New Tax law on Taxable scholarships

Paying for College
181

@CharlotteLetter

The IRS is very clear about this:

*Tax-Free Scholarships and Fellowship Grants

A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree
at an eligible educational institution.

A scholarship or fellowship grant is tax free only to the extent:

-It doesn’t exceed your qualified education expenses;

-It isn’t designated or earmarked for other purposes (such as room and board), and doesn’t require (by its terms) that it can’t be used for qualified education expenses; and

-It doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship.

Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are expenses for:

-Tuition and fees required to enroll at or attend an eligible educational institution; and

-Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

Expenses that don’t qualify. Qualified education expenses don’t include the cost of:

-Room and board,

-Travel,

-Research,

-Clerical help, or

-Equipment and other expenses that aren’t required for enrollment in or attendance at an eligible educational institution.*

https://www.irs.gov/pub/irs-pdf/p970.pdf (see Chapter 1)

182

^ Plus accumulated interests and penalties. And maybe tax evasion charge too.
Room and board is about $12K or less and the standard $12K deduction covers. Why do you want to get trouble?

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@CharlotteLetter

She will pay later…and possibly with some additional costs. The tax firm paying. Maybe. She will need to submit the letter to them to deal with. Did they sign as the preparer on her return? Is she sure they will still be in business when the IRS catches up to her.

Sorry…I’m not a fan of skirting IRS regulations in HOPES that you won’t get caught or that someone else will pay if you do.

ETA…we don’t know your whole family financial situation or your sisters. It IS possible she had no tax liability that year…but that is a totally different issue than not including this on her return.

184

Summary:
Scholarships and grants (state, Pell etc) that cover qualified education expenses (QEE) such as tuition, qualified fees and books are tax-free.

If they pay for nonqualified education expenses like room and board or transportation then they are taxable.

The student claims them under wages with SCH next to the line with the amount of the taxable scholarship.

The student should get a standard deduction of up to $6,350 for 2017 that can offset their earned income ( taxable scholarship counts as earned income for that purpose).

Then either taxable income (all income minus standard deduction) or net unearned income (unearned income minus $2,100) is taxed (using whichever amount is lower) at kiddie tax rules (at the parents’ highest marginal tax rate).

That is the tax the student owes.

1098T in 2018 has to list qualified tuition and fees paid to the institution in that year.

And scholarships and grants received by student in that year.

Schools are not required to issue 1098T if the scholarships are greater than qualified tuition and fees.

But you can request that they do because you cannot claim AOTC from tax year 2016 on without it I believe.

Schools cannot give you tax advice. Some schools tell students that they may owe taxes on their scholarships.

Not all tax professionals know very specific tax law.

I had to tell a HRBlock employee that I could file jointly with my citizen spouse as a nonresident alien, I brought the tax publication with me to show him.

I had to show another tax preparer what deductions I could claim as a home day care provider.

And I bet most of the ones around here would not know about laws concerning taxability of scholarships.

That is just not something they encounter every day.

And now we will have a new tax law.

Before 2018 a married couple could get an exemption amount of around $4,000 for each spouse and any dependents.

Plus they got about a $12,000 standard deduction.

A student who is claimed as dependent on parent tax return could still get their $6,300 standard deduction, but not the $4,000 exemption.

An individual who is not claimed by another as dependent could claim standard deduction and exemption.

If the parent was eligible to claim them as a dependent because of the support test, then they could not claim the exemption, even if the parent chose not to claim them.

Now this is changing because exemptions are going away and in return the standard deduction amounts are increased to $24,000 for married jointly and $12,000 for single.

We are not sure how the unearned income (scholarships for purposes other than standard deduction) will be taxed exactly. But it will be based on trust tax rates not parent tax rates.

Hopefully the whole single standard deduction of up to $12,000 can reduce taxable scholarships and then the lower of the taxable income or net unearned income (earned income minus an exemption amount now $2,100 in 2018 $2,600??) is taxed at trust rates.

@CharlotteLetter I would be wary of paying that tax preparer $100 if he has not told your sister that her scholarship is taxable.

I mentioned in previous posts that TurboTax Freedom edition was free to file for my D.

In the tax software interview it asked how much scholarship was received and what it paid for, if I remember correctly. When I entered the amount that paid for room and board, that was reported as taxable.

I encourage your family to sit down and enter some of the information for your sister and see what the tax software comes up with (for tax year 2017).

185

Agree that your sister is on a very slippery slope @CharlotteLetter, and glad that you plan to pay on time for the taxes you may owe.

186

https://www.irs.gov/publications/p970#en_US_2016_publink1000177956

187

Everyone. My family has more issues than just taxes that I do not want to go into. Also, I know R&B are not QEE. Doesn’t mean that I can convince my family. I convinced my sister to ask the free help at her university about it, as she’s going to have them help her with her taxes from earned income anyway.

@coolweather My sister has been on the scholarship for years. The $12k standard deduction wouldn’t help her much because it didn’t apply in previous years. Also, she has a year-round part-time job, so the scholarship is not her only income.

My oldest sister also has never paid taxes on scholarships, and since she graduated years ago (8-10 I think) she would also have no idea. Idk if she had to at that point though, because she never got R&B, and the refunds to her were so small (and probably her only income) she likely did not have to file.

@traveler98 if I don’t file, I can’t answer questions on the SF86 for a security clearance, which means my summer internships and future govt employment aren’t possible. Since no one I know IRL has ever paid taxes on scholarships covering R&B, I’m skeptical that the IRS will ever chase people who haven’t down…

188

The kiddie tax is only going to be assessed against unearned income over $2,100, as the term “unearned income” is defined by the kiddie tax regulations. Earned income, such as employment income, is never subject to the kiddie tax.

189

They might now…they will need every source of revenue possible.

Also, just because YOU don’t know anyone who paid this doesn’t mean it is not required. Ypunwpild ned to know ALL of the financials for all of these people to determine what’s what with them…in terms of their taxes. You more than likely don’t have that info.

Worry only about YOUR situation…and stop thinking about what others did or didn’t do…or should or shouldn’t do. Not your concern.

190

Overall IRS audit percentage is about 1%, and is skewed toward higher income (millions) and zero income (a business that shows all loss, for instance). So yes, the audit likelihood for a student making $15k and paying some taxes but neglecting to pay a few hundred dollars on some scholarships is very small. The linked article below is old but the current percentages by income level are about the same (too lazy right now to link a newer article but Google will turn up others for whoever looks). Even though my S is highly unlikely to be audited though, I will make sure he pays all taxes owed on his scholarships.

http://time.com/money/3820009/irs-tax-audit-chances/

191

@BelknapPoint see post #124 where I explained how my D’s taxable scholarship income was taxed.
I took those numbers right off of form 8615. She had taxable income of $1,100 ($7,400 minus $6,300) and net unearned income of $1,900 ($4,000 - $2,100).

For the kiddie tax calculation the LOWER of taxable income OR net unearned income is used.

@CharlotteLetter even some of the fees might not be QEE. Even if they are required to be paid by all students as condition of enrollment.
Our 1098T did not include the transportation and health fee, because they are not qualified fees.

192

@mommdc My university charges tuition and fees in block and together (under a “tuition and fees” label), such that I’d have no idea what fees are QEE and which ones are not. There are additional fees for living on campus (plus R&B) but those are charged as “resident” fees which would obviously not be QEE.

It occurred to me that since tuition is significantly rising starting next fall, when I enter, that even if I get the “full ride”, no money is specifically earmarked for R&B, so I could use as little of the scholarship as possible towards that, and try to apply as much as possible to tuition (meaning the scholarship would run out before covering all R&B). That could possibly decrease taxable scholarships by up to $2k, which would be nice.

193

I’m not going to delve into your particular tax situation. The kiddie tax only captures the unearned income (again, as the kiddie tax defines that term) above $2,100 for certain children.

From the instructions for form 8615:

*Purpose of Form
For children under age 18 and certain older children described below in Who Must File, unearned income over $2,100 is taxed at the parent’s rate if the parent’s rate is higher than the child’s. If the child’s unearned income is more than $2,100, use Form 8615 to figure the child’s tax.

Unearned Income
For Form 8615, “unearned income” includes all taxable income other than earned income as defined later. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

Earned income. Earned income includes wages, tips, and other payments received for personal services performed.

If the child is a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of the child’s share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). However, the 30% limit doesn’t apply if there are no net profits from the trade or business.

If capital isn’t an income-producing factor and the child’s personal services produced the business income, all of the child’s gross income from the trade or business is considered earned income. In that case, earned income is generally the total of the amounts reported on Form 1040, lines 7, 12, and 18; Form 1040A, line 7; or Form 1040NR, lines 8, 13, and 19.

Earned income also includes any taxable distribution from a qualified disability trust. A qualified disability trust is any nongrantor trust:

  1. Described in 42 U.S.C. 1396p(c)(2)(B)(iv) and established solely for the benefit of an individual under 65 years of age who is disabled, and
  2. All the beneficiaries of which are determined by the Commissioner of Social Security to have been disabled for some part of the tax year within the meaning of 42 U.S.C. 1382c(a)(3).

A trust won’t fail to meet (2) above just because the trust’s corpus may revert to a person who isn’t disabled after the trust ceases to have any disabled beneficiaries.*

https://www.irs.gov/pub/irs-pdf/i8615.pdf

194

@BelknapPoint I am not asking you to delve into our tax situation, which I only mentioned to help others who asked how taxable scholarship income is currently taxed.

But I’m asking you to look at the actual Form 8615 (not just instructions). Part I lines 1 through 5.

Maybe I am using the wrong term but it asks for child’s unearned income in line 1 and then subtracts $2,100 from that in line 2, to arrive at a number in line 3.

Then it asks for child’s taxable income in line 4.

Then it has you enter the smaller of line 3 or line 4 on line 5.

195

I’m familiar with the entries and operations on form 8615. Combined with the proper application of deductions, there’s no way that a child’s earned income, as defined by the kiddie tax, will be subject to the kiddie tax.

196

I did not say earned income, I said taxable income, as it is mentioned on the form 8615.

197

Unless you have taxable scholarships which you entered on Line 7 (1040) are considered earned income for Standard Deduction; but become unearned income and would subject to Kiddie Tax.

198

We may be talking past each other, which is unfortunate. My point has been that the kiddie tax is only assessed against unearned income (which in this case includes taxable scholarships). If taxable income is entered on line 5 of form 8615, the amount that’s being taxed won’t include any earned income.

199

Right. That’s why I said “as defined by the kiddie tax.”

Hopefully this will put things to rest: employment wages earned by a child who would otherwise be subject to the kiddie tax are not taxed under the kiddie tax, or using the parents’ highest marginal rate, or using rates for trusts and estates (starting in tax year 2018). A child’s employment wages are taxed at the child’s applicable tax rates.

200

@mommdc

Lines 4 and 5 state, 4-Enter the child’s taxable income from Form 1040, line 43; Form 1040A, line 27; or Form 1040NR,
line 41. If the child files Form 2555 or 2555-EZ, see the instructions . . . . .
5- Enter the smaller of line 3 or line 4. If zero, stop; do not complete the rest of this form but do
attach it to the child’s return."

Based on that analysis, my ds would not pay taxes on his scholarship bc his earned income is $0, so line 4 is $0 and the smaller lines 3 and 4 and is equal to $0.

Unfortunately, that is not the way it works. Without looking through everything, I am not sure where the disconnect is.