My son just completed his first semester at a college so completing the 2017 tax returns for us as parents and for him as student will be a new experience. He attends a college that gave him a full tuition merit scholarship. In addition, he received outside scholarships totally $15k so $7.5k of the scholarship money was applied to this past fall semester. I know that he has to pay taxes on the private scholarship on his tax return. I would like clarification if he will be taxed on the full $7.5k or only on $6.7 bc there were mandatory fees such as orientation, tech, and student activity fees and books. He also earned $2.8k from a summer job which he will need to included in the return as well.
We also paid the $500 deposit in the spring and for a lap top ($2k) in the summer out of the 529 account. The private scholarships were sent directly to the college in early August. I would also like clarification that we can deduct $2.5k as qualified education expenses for tax year 2017 and claim our son as a dependent under the Qualifying Child rules (he turned 19 in September).
Is this in reference to the American Opportunity Tax Credit? The tuition and fees deduction? Something else? If all of the qualified education expenses were covered by tax-advantaged money (scholarships, grants, 529 funds, etc.) it’s highly unlikely that you will qualify for any tax deductions or credits unless you elect to declare some of that tax-advantaged money as taxable.
Add up the qualified education expenses (as this term is defined for tax-free scholarships and grants) paid for your son in 2017. Any scholarship amount in excess of this received in 2017 is taxable.
The IRS bible for taxes, credits and deductions related to education:
Since $2.5k for deposit and laptop was paid out of the 529 account, I thought we can uses these as educational expense deduction. These items were not covered by the private scholarship money. The scholarship money covered, housing, meals, mandatory fees and books. Am I wrong completely wrong about this?
@4kidsdad Thanks for your reply. I realize now how dumb I am about this! Do you answer another dumb question from my original post?
“I would like clarification if he will be taxed on the full $7.5k or only on $6.7 bc there were mandatory fees such as orientation, tech, and student activity fees and books.”
Your son will be taxed on the amount of scholarships received in 2017 that exceeds the amount of qualified education expenses paid on his behalf in 2017. You will have to determine whether or not any fees and expenses paid qualify as eligible education expenses.
It’s completely understandable that a parent experiencing for the first time a child in college has questions about financing that education and tax implications. It would really be to your benefit for you to read through the relevant sections of IRS pub 970 (linked above), which will surely generate more (and probably better informed) questions; there are many people on these boards who have been-there-and-done-that and are ready to help you.
You could claim the expenses for qualified fees and textbooks for the AOTC. (You can get a partial credit).
And then include the $7,500 outside scholarship as taxable income on his tax return.
When you go through the tax software (TurboTax for example) interview for education expenses it will ask you for information from the 1098T and you will enter information for billed or paid qualified tuition and fees amounts, and scholarships received.
The school might report the outside scholarship along with the one from the school on the 1098T if they posted it to his account (my D’s school did), or they might not.
You can enter book expenses and when you indicate that the taxable part of scholarships paid for room and board, the tax software should correctly put the taxable scholarship together with his W-2 income on line 7 of 1040A, with SCH and the scholarship amount next to that line.
The W-2 income and taxable scholarship will then be considered earned income for determining standard deduction. The maximum standard deduction for 2017 would be $6,350 for him, if you are claiming him as a dependent.
Then if his total earned income exceeds the standard deduction, the net unearned income will be taxed at kiddie tax rates on form 8615.
You will have to see if it is better to claim the books and fees for AOTC, or offset the taxable scholarship amount of your S with those expenses.
It would depend on your tax rate and how much kiddie tax he would owe.
My oldest had tuition scholarship and we had additional qualified expenses every year because that scholarship didn’t cover fees or additional cost of music lessons (class for credit) or books. So some of the outside scholarship may well be used for qualified things and not subject to tax. You just have to keep up with stuff. I kept receipts from school, charges from school, and copies of receipts from book purchases to get the number each year.
@mommdc Thank you for your detailed reply. It’s very helpful. We are planning to use Turbotax. We’re now just waiting for all the tax documents to arrive.
Just keep lists of everything. Some of the fees may not be QEE (transportation, sports) if the school breaks out a fee for each item.
And while you are swearing at the IRS for the taxes your son has to pay, remember that getting $15k in scholarships for one semester is a GOOD thing. Next year when you have two semesters to deal with in the tax year, remember that getting $30k in scholarships is a good thing!
@twoinanddone Thanks for the advice. You are correct that it is a good thing; he worked extremely hard in HS, but mostly he was very fortunate to have the opportunity to apply for them since they were very specific to his EC and locale. Just a slight correction to your post - he received $15k for the first year, not semester, and $7.5 k annually for the remaining years.). I have been a bit preoccupied with the GOP tax bill and how the changes are going to affect us that things got really muddled in my mind
