Hi, so I’ve read a lot of threads on this topic, but I’d appreciate some advice on a particular situation. Here’s the scenario:
Let’s say that each year, I receive $5000 in grants/scholarships (maybe some from the government, or some from private sources, it doesn’t matter in this case). I end up using $2000 of it per year to pay for “qualified expenses”, i.e. books, tuition, and fees. That leaves me with $3000 in my bank account at the end of each year.
Given that excess grants/scholarships count as “earned income,” and I am not claimed as a dependent on anyone’s tax return, I don’t need to file taxes because the amount received each year is less than $10,000. (Let’s say I don’t earn any other income either.)
However, if I continue to receive aid for a total of 3 years, I will end up having $9000 stacked up in my bank account at the end of those years. I uncomfortable with the fact that the IRS has no idea that I have so much excess money stacked in my bank account. Is there a way where the IRS can track how much grants/scholarships (both private and federal aid) I receive, and then ask where all the money went? I don’t want to be caught by the IRS because of my ignorance.
Here’s my dilemma: if the excess grants/scholarships are counted as a form of “income,” and the amount received each year isn’t enough to file taxes (and I don’t have other income), that’s fine with me. HOWEVER, when I file my FAFSA, there is spot that says to report my “total current balance of cash, savings, and checking accounts.” On the paper version of this year’s FAFSA (2015-2016), it says “Don’t include student financial aid” in my calculation of my current balance.
So it seems like if I don’t need to file taxes, my financial aid money just “disappears” from the IRS equation. In essence, excess financial aid counts as “income” to the IRS, but it counts as “financial aid” on the FAFSA. Is this okay? Let’s say at one point I start to file taxes, and I still have excess financial aid received each year. Won’t it look funny to the IRS if this “new income source” from grants/scholarships suddenly appears on my tax return? Will they look back at the 1098-T forms my school sends them and compare, searching for anywhere that I might be “hiding” grants/scholarships?
I have already read tons of articles, both from the IRS and other credible sources, about how to deal with student financial aid reporting to the IRS. However, I haven’t found specific information on how to deal with the relationship between student aid info reported on the FAFSA and info reported to the IRS. Any info would be appreciated!
Real life examples, like what you did during such and such year, would also be helpful.
Thank you!