Starting in 2018, unearned income subject to the kiddie tax (and this includes taxable scholarships) will no longer be taxed at the parent rate. Instead, the rate table for trusts and estates will be used to calculate the kiddie tax.
But the room and board has a price, and the student is receiving the benefit of what is being paid for. So it’s still income and a benefit as far as IRS is concerned.
If you didn’t get the scholarship and wanted to live in the dorms, you would have to pay, right?
So whether the scholarship money is sent to you and you write a check, or whether it is paid directly is the same.
If you and I go out to lunch together and I buy you lunch – it is the same in the end whether I pay the bill directly to the restaurant, or if I let you pay for your own food but then later give you the money.
That is the new tax law. In 2018 it will be a $12,000 standard deduction for single taxpayers, $24,000 for married, but there will be no more exemptions. Because the scholarship is counted as “earned income” for purposes of the standard deduction, then even if you are a dependent, if your earnings and taxable portion of scholarship combined are more than $12,000,you will be able to take that deduction.
In the example I gave, where you made $18K a year and monthly expenses are $1500, you’d have nothing left over. Actually you would come up short, because taxes and FICA would be withheld from your pay check. Sure, you’d have money deposited into your bank account that you could spend, but you’d still owe the landlord and after you paid your bills you’d find yourself coming up short.
Well, it’s not quite half, but your mom pretty much has the right attitude.
The college sends a report to IRS on a form 1098-T. IRS would send you a letter to collect the money down the line. IRS is very diligent about making sure the 1098’s and 1099’s all match up. One time IRS came after me because I had deducted about $400 in student loan interest, but the lender hadn’t filed a 1098-E because they are only required to file for interest amounts of $600 or above. So I had to dig up my records to show IRS the bills that year so they could see that I really did get charged interest on that loan.
That’s the part that we are discussing and not sure about. Yes, for sure, you will be taxed… but “at what rate” is not clear right now. My advice when the time comes would be to use a standard software program to prepare your taxes --whichever one you choose --and answer all the questions the software asks you honestly, and then just pay what the software tells you that you owe. Sometimes the software gets things wrong and IRS later sends you a letter saying you owe more – but you won’t get in trouble when the problem is with the softward. That is, you may have to pay extra, but in my experience IRS doesn’t impose penalties for those types errors. It’s not the end of the world when a person makes an honest mistake on their taxes. People get in serious trouble when they purposely try to cheat or are dishonest about their finances.
That would be a very good idea.
Post deleted. Cross posted and others had already answered better.
This is confusing. My friend’s daughter received a $20k per year merit scholarship. Since tuition is more than $20k, can they say that money went to tuition and they paid room and board themselves?
@Emsmom1, unless the scholarship has terms that require it to be used for room and board or other non-qualified expenses, then it can be used toward tuition and would not be taxable at all.
@Emsmom1 yes, unless the scholarship stipulated it was for room and board only, it’s best to use it for tuition and books so it’s not taxed.
@Emsmom1 --it’s simple math. You take the total amount of scholarship, subtract out the total of “qualified educational expenses” (tuition, books,etc.) and then the remaining amount is what is subject to tax.
@BelknapPoint Is that this thing? http://www.ustrust.com/publish/content/application/pdf/GWMOL/USTp_2017_tax_rate_guide.pdf
It seems way lower, like 4.7% instead of 10% or 28%.
@calmom My sister is on a full ride and has never, ever, gotten a form from her uni. My parents said that if someone owed taxes on a scholarship, they would get mailed the form 1098. Is that incorrect?
My mom says that I can’t claim any deductions if she claims me as dependent and has some sort of exemption. I don’t see how that is the case currently or going forward, but she seems very certain on that… any idea why? What is an exemption?
My parents meet with someone to help them with taxes every year… think he charges $100 for students… maybe I could do that.
No. The tax rates for trusts and estates for 2017 are on page 5 of the document that you linked to. The bottom rate is 15%, and it goes up pretty quickly.
I don’t think the IRS gets the 1098-T. Schools aren’t required to issue them if the student is getting more in scholarships than in QEE --the very people who would pay taxes on scholarships. Schools are only required to prepare them for students who might qualify for a tax credit. They are never right anyway, so how could the IRS come looking for you? The IRS doesn’t care if you DON’T take a credit or deduction. My D who qualifies for the tax credit gets a 1098 (always wrong) and the one who pays taxes on her scholarships doesn’t get one.
1099’s. Now those the IRS cares about.
Personal exemptions are going away after 2017. Being claimed as a dependent on someone else’s tax return does not necessarily mean that you cannot claim deductions on your own tax return.
Don’t forget that everyone of those scholarships asks for your social security number. @CharlotteLetter if your sister is not paying taxes on her scholarships over tuition and books she may be in for an ugly surprise in a few years. She (and you) need to be keeping very good records.
@twoinanddone, thanks for that heads-up on potential 1098 issues. In the case of your D who pays taxes, does she have to request a 1098 from her school or is she able to file her return without one? Does she just use printouts from her student account to support her numbers?
I took a class at the local CC a few years ago and received a 1098 for the few hundred dollars in tuition. My son has never received one for his CC classes, but that may be due to his age or his status as a non-degree-seeking high school student.
The 1098-T preparer is supposed to file a copy with the IRS. Like you, I feel that in many cases the form is useless. That may change somewhat in 2018, when schools will no longer have the option to report either amount billed or payments received. They will have to report payments received.
@BelknapPoint, when you say “They will have to report payments received”, do you mean payments received BY the student (like scholarships) or payments received FROM the student?
@traveler98 , I do my daughter’s taxes. I just take the print outs of her bills by semester that have all the charges (except books) and all the scholarships/grants. I use TaxAct and it’s pretty easy. I keep all charges and payments in the same tax year as the semester.
i’ve never been asked to file a copy of the 1098-T with the tax forms or after filing, or with my taxes for the AOTC
The colleges only include money that runs through their offices. My daughter received an outside scholarship her first year, we reported it, but it wasn’t included on the 1098-T. The check was sent directly to her so the school never had the money.
@twoinandone
I assure you that IRS doesn’t care at all if the paper they have is right or not. That is why I gave the example of the year I wrote off $400 in student loan interet – when IRS couldn’t match that to a 1098 E, they sent me a letter wanting their money.
The way it works is the IRS sends a letter that says “You owe X because of this reason. If you don’t think you owe X, then you have until such-and-such time to explailn why you don’t’ owe X. If you don’t contest this amount, pay up.”
I used to have a tax guy and the year I got that letter from IRS I just gave it to my tax guy and asked him to take care of it. He did.
So no, the IRS didn’t come lookng for me… they already know where to find me. They know where to find my bank account too. They were looking for money that they thought I owed because they couldn’t match it up with other documentation connected to my social security number.
That’s not how it works. First, if the college charges tuition, it is going to prepare a 1098-T — but when I used to do my taxes while my daughter was in college, I’d log into my account area of college web site to ge the 1098-T. I pretty much do the same every year for all my tax forms. So whether a college mails it out or only provides it on request or for download, I don’t remember.
But the 1098 T isn’t the form that would tell you if you owed taxes. Rather, it is documentation of the amount of tuition charged, which would be the non-taxable part of the scholarship. So if you have a scholarship for $30,000 and $20,000 is for tuition – the 1098-T would be proof that the college really did charge $20K for tuition.
@twoinanddone is correct that that the information on the 1098 T is often wrong – typically because tuition is payable in advance, so it gets to be iffy as to whether the amount charged for the spring semester are allocated to the year when the tuition was billed or or is based on the start date of the semester. – but it’s just like the example of the 1098 E above – it is ok if the taxpayer pays based on different information than what is shown on the 1098 T, but the taxpayer needs to have their own documentation to back things up if the IRS comes asking questions.
The college files the 1098T directly with IRS.
I’m self employed and get 1099’s (and also issue them). I do not have to file the 1099’s I receive with IRS, but I do have to file the ones that I issue.
IRS matches up the documents on their own.
It is your responsibility in preparing taxes to report all income that you know about,whether or not there is a tax form to support it. The 1098-T is for informational purposes and provides documentation for an amount that can be used to reduce the taxabale portion of income.
Colleges don’t always file the 1098-T with the IRS. Students can get the following notice:
"will not be sent to IRS-as amounts do not require reporting. "
So there are amounts that don’t require reporting, and there are amount that don’t require the form be produced at all, and most of them are wrong. I’ve filed 9 tax forms (2 kids plus mine x 3 years and the 1098-T, when issued, were wrong every time. No request for the IRS to fix any return.
1099’s are income, so yes they match them up. 1098’s are for information purposes (mortgage interest paid, property taxes paid).
@BelknapPoint That’s the same or higher than the parent rate in most cases. Yech. (I was looking at some stuff by state…)
@3scoutsmom @twoinanddone @calmom How would my sister be in any trouble if she got no notification that the scholarship was taxable, and our parents’ tax accountant didn’t think it was? While she may have missed anything to that effect, my parents, especially my mom, are very careful and read everything.
@traveler98 I’ve also never received a 1098 for dual credit classes.