Hi there,
My DS has a scholarship offer for R&B of about $3500 each year ($1750 each semester). It’s my understanding that scholarships used for R&B are taxable. Can someone confirm? And is that reported on HIS return or the parents? We would still be claiming his as a dependent because he would be a full-time student and we would be providing mroe than half his support.
Room and board are not qualified educational expenses. Scholarships that cover room and board are taxable. Because it is $3500, if he doesn’t make any money, he will most likely not pay anything
So are you saying he’d report it on his return? Even though we claim him as a dependent?
Yes, he reports it as income on his tax return, but it is considered u ear ed income subject to the ‘kiddie tax.’ We’re all not sure about the way the new tax law will work, but there is a thread on the best guesses. It seems likely the student will get a standard deduction of $12000.
Never is it a 100% tax so a scholarship is better than no scholarship.
Yes, taxable to the student, as the student is the person receiving the scholarship. It doesn’t matter that you will claim him as a tax dependent. But, as sybbie says, if his total earned income for the tax year is under the standard deduction for singles (for 2018 that amount is $12,000), he probably won’t owe any tax (but don’t forget to factor in unearned income).
Thank you so much. I posted another thread on another column (parent forum) with questions about 529 withdrawals. I’m still confused. I want the 529 funds to go directly to the school. My question: Does the 1099Q report funds going to the school as being distributed to the beneficiary (my son) or someone else? (There’s a box they can check saying it’s going to someone other than the beneficiary. If that is checked when it’s going to the school, then it sounds like that could bring unwanted attention/a mismatch/closer scrutiny). Does anyone use a 520 and get it disbursed to their child? I could do that as well but figured paying the school directly is, well, most direct.
Or, I disburse to my son. I can set up the funds to go into his own checking account. Then he could write a check from his account to the college and do it that way. Is that even better? I can’t seem to find straight answers on this one…
What unwanted attention are you worried about-- you are both obeying the law AND keeping a paper trail, so what possible attention could you get?
I’ve read that 529 funds disbursed to the parent can raise a flag for the IRS (versus going to the beneficiary). There are posts on CC from people who’ve experienced exactly this. And yes, you show your paper trail and records and all is swell and they drop it. But who wants to even deal with that?? I’d rather avoid it in the first place and do whatever causes the least confusion.
I think your child will have to file a tax return since the scholarship is unearned income over $2100, and may well incur some tax since it is charged at the parent’s rate (I’m trying to figure this out myself for next year) see https://www.irs.gov/taxtopics/tc553
If they have a job (or student loan) and a scholarship that also covers tuition, it is possible that you might get to a point where you are not providing more than half their support. In that case the kiddie tax could be avoided but I’m not clear if that will provide a net gain overall when taking into account other tax benefits (e.g. Educational tax credits): another thing for me to figure out!
Scholarships are considered earned income for the purpose of determining taxable income. With the new standard deduction for a dependent who is single at $12,000, it’s easier now to avoid the kiddie tax since no tax liability means no requirement to file and therefore no kiddie tax. And if kiddie tax does come into play, it’s no longer based on the parent’s highest marginal rate; the kiddie tax now borrows the rates used for trusts and estates.
In going through the support test to determine whether or not the child can be claimed as a dependent on the parent’s return, scholarships are not taken into account in determining whether the child provided more than half of his or her own support.
Generally speaking, if the scholarship is from an outside source, and the check is made payable to the college/university, (or if the scholarship is from the college) and is deposited to your students bursar’s account from which it is then credited against room and board charges then it is NOT income to your child.
Scholarships which are paid directly to the student from an outside source and come with a 1099 filing are income to the student.
When you have a choice, always have the checks made payable to the college to avoid the income issue.
Citation for this?
Why would it matter if the scholarship for room and board came from an outside source paid to you or to the school? If the school gives you a scholarship for room and board, it is taxable. I believe it is taxable no matter where it comes from. No free lunch (or place to sleep) from the IRS.
Scholarships paid to the student do not always come with a 1099. My kids each received on and never received a 1099. The organization never asked for their SSNs. If it had had a 1099, we would have reported it as a scholarship, not necessarily taxable.
To echo twoinanddone, this is not true. Scholarships that exceed qualified expenses (tuition, certain fees, required course-related expenses) are taxable as income to the student. It doesn’t matter where the scholarship comes from, how it is delivered, or where it is deposited.
Remember, the IRS has different definitions for the term “qualified expenses” depending on what you are talking about. For instance, room and board is a qualified expense for 529 money, but it is not a qualified expense for determining the taxability of scholarships. Perhaps this is causing some confusion.
See chapter 1, *Scholarships, Fellowship Grants, Grants, and Tuition Reductions/I:
You folks are correct, doesn’t matter if it is paid directly to the school or the student. I misinterpreted a somewhat unclear scholarship reporting statement .
This thread has been very helpful! I have another question: let’s say I got $8,000 scholarship and I used $1,000 of it for qualified expenses and $7,000 for R&B. I withdrew $8,000 from my 529 account because I can withdraw the equivalent of scholarship amount without any penalty. How much of $8K is taxable? Is it $7K because that’s what I spent on non-qualified expense? Or is it only the earnings portion of $7K (because I withdrew it from 529 and contributions can be withdrawn without any tax)? Or is the entire amount non-taxable because R&B is a qualified expense under 529?
Thank you very much for your help!! I will really appreciate it!
The 529 needs to apply on QEE (different criteria than IRS) too.
I am sorry, I am not sure what you meant. Can you please clarify? Thanks!
I think if you want to avoid paying tax on the 529 earnings, you’ll need to use the whole $8,000 of the 529 distribution for qualified expenses ($1,000 tuition and $7,000 room and board).
Therefore the whole $8,000 of scholarship should be taxable since there are no tuition expenses left to reduce it.
I think on the support worksheet it also asks how much of the student’s earned income was spent on their own support. So a student just earning money does not automatically disqualify the parent from claiming him as a dependent.
The student would have to actually spend some of his earnings on their own support.