@profdad2021, this tax provision isn’t something most people have to even think about since most students don’t get scholarships in excess of tuition, fees and books.
Really…it’s your responsibility or any family’s…to keep track of the scholarships awarded in a tax year…and the expenses like books. And knowing the amount that tuition, and fees were billed and PAID during that year.
But as noted…most students don’t have that issue.
But buyer beware…if your kid does have a scholarship…and receives a 1098T…it is probably a good idea to at least know it means something…and figure out what I’d FOES mean for your kid. It’s probably not a good idea to just ignore it.
Folks, if I understand this right, it is not just scholarships, but also financial aid that is taxed if it exceeds tuition, fees and books. So a very low income student who gets full need paid for at Harvard would owe these taxes.
@traveler98 @thumper1 I THINK you folks may be telling me that I MAY have to actually PAY for tax filing guidance, for the first time ever!!! This is NOT a very nice Christmas present. LOL. But no worries, it is unlikely it really matters in any substantive way.
@psycholing A better way of phrasing that would be grant $$. FA could be loans. Loans, obviously, are not taxable, but yes, I think you are correct that institutional grants covering expenses beyond QEE are taxable.
That is not an excuse the IRS cares about. Most taxpayers learn about it the first year the student has to pay taxes or the parents want to take the AOTC. All the tax programs (Turbo Tax, TaxAct) ask the question about scholarships, other fees paid, etc. and calculate the taxable amount.
Yes, people are SHOCKED when I say my daughter has to pay taxes on her scholarships. No free lunch for the IRS, and no free room either, or free spending money, or travel or insurance money. It’s taxable. Yes, even to football and basketball players.
For students considering full rides at various schools, it will now matter (more) whether the room and board that is ‘free’ is worth $8500 (as it was for one of my kids) or $13500 (as it was for the kid who actually paid taxes on it) or $18000 at NYU or the Ivies. The student going to the Ivy will pay on the additional $10k in ‘value’ even if it is basically the same twin bed and dorm food at Harvard or Wyoming.
@twoinanddone THANKS!!! I wasn’t making an excuse. Just making conversation. This would be first tax year it could possibly be relevant.
@Mom2aphysicsgeek Quick question - for you and others: To determine if scholarships are taxable, I’m guessing that one would add up ALL the “free money” for a specific student. This would be the sum of “free money” from the university itself, plus the dollar value of scholarships obtained elsewhere. Is this correct?
@thumper1 Thanks!!! I did not say that I ignored the form. I read it. I was confused by the numbers on it because it did not fully reflect what had transpired in the stated year. I then exchanged several emails with the school about it. the form proved not particularly relevant for us since the “free money” was not that high and we are not eligible to deduct school expenses on our taxes. At least, to my knowledge we weren’t. I’ve never used even a canned program for taxes but for 2017 taxes, I probably will!
As for keeping a record of expenses, we do. Not tough since very little these days is paid with cash.
More generally, It would come as a surprise to me if the most expensive schools don’t inform their “full ride” students of this tax liability, particularly since there is a strong correlation between those students and NOT having lots of experience with complicated tax questions. In anticipation of the responses I’m likely to get for making that statement - NO I am not asserting that it is the responsibility of the school to inform students of potential tax liabilities, I’m just saying that it would make sense as part of the umbrella of support that they provide, particularly for first generation students.
Publication 970 explains the rules concerning taxability of scholarships.
https://www.irs.gov/publications/p970
(See Tax free scholarships and fellowship grants)
If a scholarship or grant covers qualified education expenses like tuition, certain fees and required textbooks and course supplies, then it is tax free.
If it covers nonqualified expenses like room, board, transportation, healthcare, then it is taxable income to the student.
Whether it is subject to tax and at what rate depends on several factors that we have been discussing here.
And now there is added uncertainty in light of the new tax law.
Also I don’t think schools have to issue a 1098T when scholarships and grants exceed qualified education expenses since the form is primarily intended to help taxpayers figure the AOTC they can claim.
@mommdc Thanks! I just had found this publication. But really, to be safe, I will probably, at a minimum, use a canned tax software program for guidance the next time we file. We’ve got VERY simple finances and so it hasn’t been necessary in the past. Even with this “new information to me” about taxable scholarships, this would be the first year it even COULD be relevant.
Pell grants and state grants can be taxable too if they cover nonqualified expenses.
For example PHEAA grant can cover room and board.
Some state grants like NY TAP can only be used for tuition, it depends.
Taxable scholarship may be a recent change in the tax law. Some older college professors were surprised too, as they didn’t pay any taxes on their scholarships while they were in school.
@mommdc what about supplemental scholarships from nonprofits?
@mommdc Given your citation from Publication 17 - “For purposes of the standard deduction, earned income also includes any part of a taxable scholarship or fellowship grant.” – why do you believe that the excess scholarship income would also be subject to the kiddie tax (which applies to unearned income only)?
I don’t think the new law addresses scholarships in any way, but what has changed is that there is less of an incentive for parents to claim college age students as a dependent. Whereas before the dependent exemption could result in net tax savings of more than $1500 for high tax-bracket parents, now at best there is a $500 tax credit.
I understand that the rules about kiddie tax are written in a way that is not tied to dependency, but when I look at other provisions in the tax code (Title 26, sections 1 and 152) , I end up with this:
I don’t interpret that to mean that the existence of the scholarship prevents the kid from meeting the 50% test, if that kid has other earned income. I just interpret it to mean the support test would mean that if you consider the student’s income from all sources other than scholarships, then the student’s earned income needs to be above 50% to avoid kiddie tax. So, for example, if scholarship is $20,000 – student earnings are $5000 – parental support is $1000 – then I would think that the kiddie tax would not apply, because $5000 is obviously a lot more than $1000.
@profdad2021 any scholarship money not used for tuition books or certain approved expenses is taxable no matter the source the only exceptions I know of is the PELL grant and service academys.
The 1098T only shows the qualified education expenses such as tuition and fees (not all fees might be qualified).
And it shows the scholarship and grants that the school applied to the bill.
If the student received outside scholarships they might not be reflected on the form.
Room and board is not a qualified expense for AOTC either so it is not reflected on the 1098T either.
Also it depends when the qualified expenses were billed and when scholarships and grants were posted during the year.
Some schools list both semester expenses and both semester grants and scholarships on the form for the year, some have only fall expenses and aid on it, and spring expenses, but spring aid is on the next year’s form.
From 2018 on, the 1098T is supposed to list qualified tuition and fees paid (not billed) during the year, and scholarships and grants received.
And I believe a 1098T is required to be able to claim AOTC.
But AOTC is a topic for another discussion.
That’s it right there - taxable scholarships ARE subject to the standard deduction. I didn’t think two reputable tax preparers last year would both be wrong.
So it appears, as I said way above, that students could have up to $12,000 in taxable scholarships without incurring taxes.
For some of the folks that are incredulous about some scholarships being taxable, a number of colleges actually post this on their websites and some actually give students extra $$$ to cover taxes. I think Amherst may be one.
Yes like the quote in Pub 17 says, taxable scholarships are treated as earned income for standard deduction purposes.
It does not say that taxable scholarships are treated as earned income for all purposes.
Well the point is, say you have earned income plus scholarships = $12,000.
Standard deduction = $12,000
Taxable income = 0 (zero)
Then you go to the kiddie tax form and it tells you to use the lower of unearned income over $2100 (will be $2550 in 2018) OR taxable income.
Hence, student will use ZERO taxable income which equal ZERO tax.