Yes, I understand that. Again - IRS really did write me a letter and want more money when they could not document my student loan interest deduction with an 1098-E. Just because it hasn’t happened to you doesn’t mean it hasn’t happened to anybody else. I checked my records and I see that I had to get a letter from Sallie Mae documenting the interest and my tax guy wrote to the IRS for me with that information.
I’ll bet if I tried to deduct and amount for mortgage interest that didn’t match up with a form 1098 I’d run into problems too.
The IRS gets the “information” and then it compares it to the tax return. The student loan interest thing happened was on my 2005 return but the IRS wrote me in 2007 and they had a bunch of other stuff too, so maybe it was the other stuff that triggered them to check all the details in the return. (The other stuff was wrong too).
You are right that 1098-T’s tend to be inaccurate, so IRS probably doesn’t expect it to match - but I’ll bet that if you filed a tax reform claiming a tuition credit and there was NO 1098-T at all you’d end up getting an inquiry from IRS.
I think you’d need to address that question to the tax accountant, because he would be expected to know – that is, assuming your parents told him about the scholarship.
I’m skeptical of the claim that your sister was not told that a scholarship covering room and board was not taxable - it is something that I would expect would be included on the award letter. But even so, that’s not an excuse when it comes to income tax.
I am not surprised this family didn’t know scholarships were taxable. Most families I speak with have no idea. I found out from reading CC. We were not told that with the scholarship award. I am glad we knew ahead of time bc we were able to plan ahead for the amt we owed.
Additionally, we had no idea that REUs were considered scholarships. That, unfortunately, we were not prepared for. We thought he would be able to count that as earned income, but instead we were hit with an additional large amt of unearned income kiddie tax.
Tax accountants have been useless bc they don’t know, either. I called several trying to get help and not a single one knew anything about scholarships exceeding QEE and what happens if a student does not receive any financial support from their parents but equally cannot claim scholarship money toward their support (which is what is paying all their bills). I gave up and spent hours reading different tax forms and ended up giving up there to. It just went in circles. We just entered it all in as unearned income and paid the taxes at our kiddie tax rate.
Fwiw, do NOT trust Turbo Tax for your state return in terms of scholarships. It had us pay state taxes on scholarship $$. We found out later that our state does NOT tax scholarships. Know your state law.
I suspect that most families who aren’t on CC have no idea they are supposed to pay taxes on full ride scholarships. DD’s school never said anything to us when awarding the scholarship. I wouldn’t be surprised if some of the others who receive the same scholarship as her don’t do anything with it when it’s time to file taxes. Although this is a merit award, at least one recipient that she knows has serious financial need and honestly probably can’t afford to pay the taxes on the scholarship.
I’m sure many of the schools or other grantors of scholarships have no idea that the scholarships are taxable, but they have no duty to tell you that the award could be taxable. Someone who hires you has no duty to tell you the income might be taxable (and they may not know). My daughters received $2000 from an outside group, and that group would have no idea if that was the only money received or if it was the last money received and used for non-QEE expenses.
@CharlotteLetter , each taxpayer is responsible for completing a tax return with the correct information. If your sister or parents used a tax program, it walks you through the questions and prepares the correct forms. If your accountant doesn’t know, then it is his responsibility to find out. The IRS rarely takes “But we didn’t know” as an excuse.
It’s “Payments received for qualified tuition and related expenses” which is the entry for box 1 on the form. Starting in 2018, the box for amounts billed (box 2) will be grayed out, because the schools will no longer be allowed to use the 1098-T to report that amount. To elaborate, the 1098-T instructions for box 1 say this:
Box 1. Shows the total payments received by an eligible educational institution in 2018 from any source for qualified tuition and related expenses less any reimbursements or refunds made during 2018 that relate to those payments received during 2018.
I can verify that not all schools specify in the initial award letter that a scholarship may be taxable. My son’s current scholarship award for UT Dallas Fall 2018 matriculation includes tuition and fees plus $3k stipend per semester. Obviously there’s no way that the whole $3k stipend could be spent on non-taxable QEE, but the award letter makes no mention of potential tax. S won’t receive the higher level NMF scholarship award until the spring, but there’s nothing anywhere that I could find on the UTD National Merit page or the school’s financial aid website notifying NMF students that their scholarship is partly taxable. And UTD is a big merit school with lots of students awarded scholarships in excess of tax-exempt QEE. So if the college doesn’t bring it up, and a family’s trusted accountant doesn’t bring it up, and “everyone knows” tuition scholarships are tax-exempt, and room & board is a QEE for 529 distributions, and no 1098-T is even prepared let alone sent to the student, then I can certainly see how a family would honestly not know they owe taxes on some scholarships.
Tax dummy here. Would anyone mind summarizing in simple terms what is happening? Sorry I read through all of the threads but can’t seem to understand. I didn’t realize that scholarships were taxable. Was this the case in the past? Or only with the new GOP tax bill that went into effect?
What does this mean for private colleges who have large financial aid budgets (Ivies, Stanford, etc)? Will these colleges be reluctant to give scholarships to students who don’t have the means to pay the tax? Would they pay the tax on behalf of the students? I can see this leading to a situation where low income students are wooed by many private colleges, but only to find out they will need to get a job to pay off the tax bill each year. In these cases the student may be better off staying at State U so they can avoid the tax.
@sgopal2 It has been the law for at least the past 4 yrs. I don’t understand all the ins and outs of the new law, but in previous yrs the tax rate has been based on parental income but taxed at the unearned income rate vs. income tax rate. Our ds’s tax bill was hefty bc not only did he have scholarship $$ covering all room and board expenses, but he also had REU stipends which were also considered scholarship $$. It would have been an unpleasant surprise if we hadn’t been prepared ahead of time that we would owe such a large amt on the scholarships.
@4kidsdad I am not sure if you are being sarcastic or not, but that is what it may boil down to for some families bc the amt can be quite large. It can be a good problem to have, but it is a financial issue that many families need to be made aware of bc they arent financially prepared for it and need to be able to pay the tax bill.
I did not read the entire thread. If I remember correctly, in the past, part of the scholarship used to pay tuition was not taxable. Only part of the scholarship used to pay room and board was taxable. Is this changed?
So if you are at a university that requires room and board for attendance, that’s fees within QEE. That would at least take care of my sister’s freshman year, as living off-campus was not permitted for out-of-state frosh.
@thumper1 It says “required for enrollment or attendance at THE educational institution” (that particular one), not “required for enrollment or attendance at ANY educational institution.”
Also. I know non-QEE scholarship monies are taxable. My sister won’t listen to me, so there isn’t much I can do. If I get them, I will be paying taxes on them, unfortunately.
@CharlotteLetter Room and board is never a QEE. @thumper1 is absolutely correct. My ds attended a school that required freshman to live on campus. Many do. Still not a QEE.
Once again…your sister or you didn’t HAVE to CHOOSE a college where dorm residency is required. It’s a CHOICE…and the scholarships for room and board are considered taxable.
Your sister is on a slippery slope…but that’s her problem. I can tell you first hand…it is NO FUN getting a letter from the IRS, which can happen years later…and have to find the documentation to prove your point. Plus…your sister won’t have a point to prove if she was supposed to put this on her tax return…and didn’t.
@thumper1 Well, if/when she gets a letter from the IRS, she should be able to pay all previous years because she will have a good job by then. If the accountant said, several times, not to pay taxes on the scholarship because scholarships are non-taxable, and his firm pays additional penalties, etc. then won’t she just end up paying later than she would have otherwise?