New Tax law on Taxable scholarships

Paying for College
21

@twoinanddone it’s four year commitment for the greater scholarship and the lessor scholarship is only open to freshmen you must accept or decline before starting freshman year you can’t just switch later on. Both are flat rate scholarship with no option to take less. If he takes the lessor scholarship he could work summers, maybe part time during the school year which whould not be taxed at such a crazy high rate and could be used that to pay off scholarship taxes. Since he can’t work if he takes the higher scholarship he may have to take loans just to pay taxes.

I just want to run some real numbers to see what would be best. Where can I find concrete information?

22

What kind of scholarship prohibits a student from working in summers…when they are NOT enrolled at the university?

These scholarships were likely set up prior to this year. I would contact the college…and ask about that NO work provision in light of the recent tax reform passage, and tax liability.

23

http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf

24

With the old kiddie tax system, taxable scholarships were earned income for the purpose of determining if tax return had to be filed, and figuring standard deduction, and unearned income for the purpose of the kiddie tax, is that no longer the case then?

How would that income be designated on the tax return? Now it is listed in the wages line, with SCH next to it. And there is no longer a standard deduction for unearned income? Or is it the $2,600?

@3scoutsmom, does this $16,800 scholarship only cover room and board exactly?
That seems really high. Or does it cover room, board, travel, personal expenses (so COA minus tuition, fees and books)?

Wouldn’t there be some money leftover, after room and board is deducted?
Then can that money be used to pay the taxes?

Even if the tax would be over $3,000 the $16,800 scholarship would still give him more than the $11,000 one.

I would find out about the work restrictions. He can still do paid internships you said, right?

And could you maybe pay the taxes for him, as your parent contribution, if all of his other expenses are covered?

25

@scoutsmom “Who should I contact to get official confirmation on how this new tax works with scholarships?”

I doubt that you can get official confirmation any time soon.

You can seek out and engage a CPA in your area and make an appointment for a tax consultation.

26

I agree with comment that there is no 100% tax and the comment to contact the school about the work restriction.

27

How does one know if the scholarship is taxable? I thought these merit or athletic scholarships that incoming freshman receive are non-taxable and just a non event for calculating taxes.

28

@MassDaD68

Scholarships in excess of tuition, fees, books are considered taxable.

29

@3scoutsmom

Are you saying the school prohibits your kid from doing things like babysitting, shoveling snow (climate permitting), pet sitting, mowing lawns, house sitting…during vacation times when they are NOT at school?

My kids made a good amount of money doing these things.

In additions, some kids need to work for discretionary spending money, or to help pay the family contribution at a college…while they are students.

I just find it hard to believe that a college can place this employment restriction on a student…unless the student is receiving a monetary stipend instead. I do know some grad students with stipends either can’t or are not permitted to work.

30

There is a monetary stipend included in the scholarship being mentioned. Work is restricted to only education related endevors (ie internships) Additionally, the amount of time a student is allowed to spend at home is also restricted. It is a very unusual scholarship.

31

The amount of time a student can spend at home is restricted?

How much is the monetary stipend? Will this cover the tax liability?

What about the tuition tax credit or LLC? Would the family be able to use these to help with the tax liability?

Does this mean the student doesn’t get the regularly scheduled college days off or vacation times…like winter break, spring break?

32

They are allowed to come home for 2-3 weeks during winter break, 2-3 weeks for summer and one each for spring break and thanksgiving. They must be in residence, interning or studying abroad the remainder of the year. The scholarship commitment is for 8 semesters and (at least) 3 summers. While in residence, they also have volunteer and campus involvement requirements. The program does not want them spending their time in a minimum wage job, which is why they receive a stipend.

(My child is a current recipient)

33

Not an accountant here, but it seems to me that if the child is reporting (and paying tax on) unearned income which provides over half of their yearly living expenses, then they would file their own return claiming the standard deduction and the American Opportunity Tax Credit. Also in this case, they would no longer be claimed as a dependent on their parents return

34

Scholarships/Grants are not considered as providing 1/2 of the student’s support. He/She will still be dependent on their parents’ return and can’t use the standard deduction.

Here is the tax table for trusts in the document that Madison linked:
Estates and Trusts
Not over $2,550 10% of the taxable income
Over $2,550 but not over $9,150 $255 plus 24% of the excess over $2,550
Over $9,150 but not over $12,500 $1,839 plus 35% of the excess over $9,150
Over $12,500 $3,011.50 plus 38.5% of the excess over $12,500

Again, only tuition, academic fees, and books are not taxable. Everything else like room and board and health fees, insurance IS taxable. Also for those of us that “shift” more scholarship to the taxable portion to take the AOC, that would also be taxable. That makes it almost certain to push a portion over the $12,500 into the 38.5% tier.

35

@Thumper1 yes it is a major monetary stipend and he would be required to remain on campus year round. He can come home for Thanksgiving weekend, Christmas Break and Spring Break and I think up to four weeks in the summer (two weeks at the beginning of summer break and two weeks before classes start again) though it might be only two weeks in the summer either at the beginning or end of the summer break, I wasn’t really clear on that. So when you take in travel time, not a whole lot of time left to work. It’s unlikely he could find a paid internship until his second or third year.

The major scholarship he is in the running for has a lot more taxable scholarship than just the stipend I’m just starting with that to get some sort of idea where he would be in taxes.

@Mommdc the scholarship includes a $1400 monthly stipend year round ($1k a month is paid directly toward room and board and other $400 for personal expenses) but the scholarship includes a lot of other taxable awards

It includes:
Full tuition and fees for four years - can not graduate early (not taxable)
$1,400 monthly stipends, year-round
$1,000 yearly textbook stipend (not taxable if used entirely for text books)
$12,000 fund for scholar-designed study abroad
$3,000 fund for individualized professional development
Travel expenses for cohort trips to Santa Fe, Austin, and Washington, DC
Tickets to the Symphony, Opera, Ballet, Theater, and other cultural events
Travel home twice yearly for domestic students, and once yearly for international students

With all the required taxable travel and “extras” if he is taxed at 38.5% even if he puts all of the $400 a month toward taxes it still won’t cover taxes. It’s a very generous scholarship and amazing opportunity and we will help with taxes as we can but I really need to have some idea how much this is going to cost us.

The other scholarship which is automatic for National Merit covers:
full tuition and mandatory fees for eight semesters
$4,000 per semester cash stipend to defray the costs of books, supplies, and other expenses
$1,500 per semester housing stipend for students living on campus,
one-time award of up to $6,000 for an international study abroad program.

This comes out to be just a few hundred dollars under a full ride. No work restrictions or required staying on campus over the summer.

Yes, I know my son is incredibly fortunate to have the possibility of these amazing scholarships but I want to understand the tax implications before he has to make a decision.

36

For those wondering, the complex scholarship being discussed is the McDermott at UT Dallas. My S has also applied for it and has a small chance of receiving it (extremely competitive, and he was not named an early finalist as @3scoutsmom’s S was, so is obviously less likely than @3scoutsmom’s S to get the award), so I’m finding this thread quite interesting. The tax implications are a bit headache-inducing even for the smaller NMF scholarship at UTD (which, barring some unprecedented issue, S will get), but it’s a good problem to have.

37

@fidoprincess
Sorry, Madison is right about the rate table. The linked article was using cap gains rates. The new ordinary income (this is ordinary) tables are on page 536 under “Estates and Trusts”. The highest rate is 37%. Make sure you are looking under “”Conference Agreement” with the rate tables under it.

38

Thank you again, HRSMom, Yes, I see the correct table now on page 536. It’s this:

Estates and Trusts
Not over $2,550 10% of the taxable income
Over $2,550 but not over $9,150 $255 plus 24% of the excess over $2,550
Over $9,150 but not over $12,500 $1,839 plus 35% of the excess over $9,150
Over $12,500 $3,011.50 plus 37% of the excess over $12,500

So this is where the 37% figure comes from, was originally the 38.5%, whew, so much better, just kidding!

At least we know ahead of time so that is something. Thank you everyone for posting in this discussion.

39

Explanation of taxable scholarships and Publication 970

https://www.irs.gov/publications/p970#en_US_2016_publink1000178003
https://www.irs.gov/publications/p970

40

To add to the complexity of taxable scholarships, let’s add in 529 distributions to the mix!

For my son’s example, he will receive a $4000 per semester non-accountable stipend. Let’s say $1000 goes toward books for the year, leaving $7000 yearly taxable unearned income for which he would pay tax according to the table in post 37. I checked, and the stipend definitely is non-accountable and can be used for anything the student wants.

Is it possible, then, to pay for S’s expenses using qualified distributions from the 529 account? Say his total expenses come to $10,000 per year AFTER books. He will pay tax on $7000 of non-accountable stipend; can I use a qualified 529 distribution of $10,000 to pay for his expenses, or can I only make a qualified distribution for the difference between the stipend and the total? And if only the difference is allowed, can the stipend taxes be considered?

Using the tax info from post 37, the tax on $7000 stipend would be $1323. After taxes, S would have $5677 left from his stipend to pay toward $10,000 of expenses. Which qualified 529 distribution can I take:
A) The full $10,000 because the stipend is non-accountable and does not have to be used for school related expenses.
B) $3000, the difference between expenses and pre-tax stipend.
C) $4323, the difference between expenses and after-tax stipend.

@-)

Edit to add: I already know about taking taxable but non-penalty 529 distributions due to scholarships. This post is just about making sure I don’t lose out on qualified distributions.