<p>Hi, my son will be a Freshman next year and I have a few questions about tax implications. Sorry if these are basic to those who have been through this before.</p>
<p>He received a NMSC Special Scholarship for $8,000 per year and an Academic Merit Scholarship for $5,000 per year from his college Total of $13,000 in scholarships per year. He is an 18 y/o dependent. The NMSC scholarship checks will be mailed bi-annually direct to the college, payable to “Student or College.” Presumably the college will deposit the check and apply it to our account. The Merit scholarship will simply be applied to our account.</p>
<p>I anticipate Qualified Educational Expenses (tuition, books) will be about $10,000 per year and non-qualified expenses (room/board) will be another $11,000 per year. So if I understand correctly, we will need to report $3,000 in scholarship income. (13k-10k)</p>
<ol>
<li><p>Should this scholarship income be reported by the student or the parent on tax returns? </p></li>
<li><p>I understand the college will send us a 1098-T which will list Qualified Expenses. Am I limited to the amount shown on this form, or can I add in items they do not list, like books, laptop, etc?</p></li>
<li><p>Do we have the option of allocating the scholarship funds toward specific Qualified Expenses or Non-Qualified expenses if it is to our advantage to do so? Or does the college just allocate it to Qualified Expenses automatically? Can I tell them how to allocate the funds?</p></li>
</ol>
<p>My concern is that if the scholarship money is all applied to Qualified Expenses, then I won’t be able to take the full $2,500 AOTC credit by paying $4,000 cash, because my payment will go toward Non-Qualified expenses. So it might be to my advantage to apply my $4,000 cash to Qualified Expenses. I could then apply $6,000 of the scholarship money to the remaining $6,000 of Qualified Expenses. This would leave $7,000 of Scholarship money that would be applied to Non-Qualified expenses, meaning someone would need to report that $7,000 as scholarship income. If my son reports the income, his taxes would be very low because he does not earn much else and he gets a $6100 deduction. Can we do this? </p>
<p>Thanks!!!</p>
<p>You will,have to check with the college regarding designation of the scholarships for non-qualified expenses. They will tell you whether this can happen. Many colleges apply aid to tuition, and fees first…then room, board and other costs. </p>
<p>Check with your son’s school.</p>
<p>You should keep a list of qualified expenses that you purchase. This would include books, for example.</p>
<p>Also, for freshman year, you may only see 1/2 of these disbursement and costs before December 31…depending on your school’s billing cycle.</p>
<p>For most families, it will make sense for taxable scholarships to be reported in the student’s name, as the student will likely be in a lower tax bracket and therefore pay less tax on the scholarship money. However - and this is where things get tricky - taxable scholarships are considered unearned income by the IRS for the purpose of the “kiddie tax,” and a dependent child with more than $2,000 in unearned income will likely have to file IRS Form 8615, which means that at least some of the taxable scholarship money that has been reported in the student’s name will be taxed at the parents’ highest marginal rate. Make sure you know what will happen in your specific situation before taking any action. There was a recent thread here on CC about taxable scholarships and the kiddie tax; it would probably be worth your while to find and read through it.</p>
<p>I’m pretty sure it is not considered unearned income. You may want to look into it.</p>
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<p>From the instructions for Form 8615:</p>
<p>“For Form 8615, “unearned income” includes all taxable income other than earned income as defined later. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.”</p>
<p><a href=“http://www.irs.gov/pub/irs-pdf/i8615.pdf”>http://www.irs.gov/pub/irs-pdf/i8615.pdf</a></p>
<p>This is a change from tax years prior to 2013. For 2012 and earlier, for the purposes of the kiddie tax and Form 8615, anything that wasn’t “earned income” was “investment income,” and the definition of “investment income” did not explicitly include taxable scholarships. For Form 8615, “investment income” has now become “unearned income,” which explicitly includes taxable scholarships, as per the above definition.</p>
<p>OK. I see that. Below is an excerpt from the 8615 form instructions on who has to file</p>
<p>Who Must File
Form 8615 must be filed for any child who meets all of the
following conditions.
- The child had more than $2,000 of unearned
income.
- The child is required to file a tax return.
- The child either:
a. Was under age 18 at the end of 2013,
b. Was age 18 at the end of 2013 and did not have
earned income that was more than half of the child’s
support, or
c. Was over age 18 and under age 24 at the end of
2013, was a full-time student, and did not have earned
income that was more than half of the child’s support</p>
<p>Based on the OP’s set of facts, it sounds like the student will be subject to the “kiddie tax” and need to file Form 8615.</p>