Are we the only ones surprised to learn this? I’d just assumed that it simply meant a reduction in the tuition by the amount of the scholarship! Foolish me.
It’s no big deal–the scholarship was a nice surprise–but if you’re as naive as we were, consider this your warning!
From irs.gov
Topic 421 - Scholarships, Fellowship Grants, and Other Grants
A scholarship is generally an amount paid or allowed to a student at an educational institution for the purpose of study. A fellowship grant is generally an amount paid or allowed to an individual for the purpose of study or research. Other types of grants include need-based grants (such as Pell Grants) and Fulbright grants.
Tax-Free
If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:
You are a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.
Taxable
You must include in gross income:
Amounts used for incidental expenses, such as room and board, travel, and optional equipment.
Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. However, you do not need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.
How to Report - Generally, you report any portion of a scholarship, a fellowship grant, or other grant that you must include in gross income as follows:
If filing Form 1040 (PDF), Form 1040A (PDF), or Form 1040EZ (PDF), include the taxable amount in the total on the “Wages, salaries, tips” line of your tax return. In addition, if the taxable amount was not reported on Form W-2 (PDF), enter “SCH” with the taxable amount in the space to the left of the “Wages, salaries, tips” line. If filing Form 1040NR (PDF) or Form 1040NR-EZ (PDF), report the taxable amount on the “Scholarship and fellowship grants” line.
Estimated Tax Payments - If any part of your scholarship or fellowship grant is taxable, you may have to make estimated tax payments. Refer to Publication 505, Tax Withholding and Estimated Tax, for additional information on estimated tax.
Additional Information
For more information, refer to Publication 970, Tax Benefits for Education.
More Tax Topic Categories
Page Last Reviewed or Updated: January 04, 2016
It sounds like we should not have been taxed then. We do not receive a check and therefore have no choice about how to spend the scholarship money. We just receive a bill for tuition, room and board that is reduced by the amount of the scholarship. I guess we should take this up with our financial adviser. Thank you!
Your son is an undergraduate? Does the merit scholarship exceed the cost of tuition and academic fees?
How have you been “taxed” at this point?
We got a statement from the college. He’s at Oberlin, and the scholarship is $18K per year.
My understanding has always been that if it only covers tuition it is not taxable. Maybe call Oberlin to and ask for an explanation.
The statement from the college is probably just a record of what you paid so you have the info you need to claim educational credits.
It’s my understanding that the part of scholarships that covers room and board is taxed to the STUDENT not the parent and but the student must pay at the parents tax rate.
A college must send a Form 1098-T to anyone who pays qualifed education expenses to the school. This form will also show any scholarship received.
If the scholarship does not exceed the cost of tuition, fees, and books, your child would not owe any taxes on the scholarship.
Who says you’re being taxed on it? If it’s your preparer, you need a new one. If it’s the school, they may just be sending a statement.
Yes, you may subtract from the amount of the scholarship the amount of tuition, fees and books to arrive at the taxable scholarship amount, if any.
You might also be able to claim an education credit.
Take the billing statements and 1098T to your tax advisor to see what he recommends.
18k is almost certainly less than tuition at oberlin, so it shouldn’t be an issue.
Look at the 1098-T. if box 5 is greater than box 2 then the student (see 3scouts’ comment above) would include this as ‘wages’ in their 1040 (with a note including this specific amount as ‘SCH’).
Of course the 1098-T may not be correct, you need to insure the numbers are correct when the student files their return.
A couple of other tidbits. This ‘SCH’ amount is included as ‘earned income’ for the sake of the calculation of their standard decuction if a dependent, but it is ‘unearned income’ in the form 8615 which is used instead of the tax tables in determining the actual tax. Note that this 8615 form could possibly impact the parents’ returns.
Links:
Standard deduction calc https://www.irs.gov/publications/p17/ch20.html
Form 8615 instructions: https://www.irs.gov/pub/irs-pdf/i8615.pdf
Thanks, everyone, for your helpful replies!
In some cases, you may want to make part of the scholarship taxable income so that you have at least some of the QEE paid out of your pocket for up to $2500 tax credit. Check if the scholarship allows you to pay other part of CoA outside tuition and fees.
Yes, the portion that covers room and board is taxable income. Has been for a while. I had to pay taxes on the room and board portion of my scholarship in college. Was quite irritated to find this out myself.
That’s what our FP said, @Juillet. It’s a shame Oberlin won’t let us apply it all to tuition!
Thanks everyone for the very helpful responses as I am struggling with this issue now too.
“That’s what our FP said, @Juillet. It’s a shame Oberlin won’t let us apply it all to tuition!”
OP, what does this mean? On the 1098 Form, there is a box for “qualified tuition and fees” or something like that, and another box that contains the amount of the scholarship. How are they saying they won’t let you apply it all to tuition?
I guess the college decided what portion we could apply.
Unless it is specified by the scholarship, you should be able allocate the money for QEE other than tuition. You may be able to allocate it for other part of CoA too, but I don’t see any benefit from it.