I think that the confusion arises in the determination of the ‘standard deduction’. The instructions for the ‘standard deduction’ states that ‘earned income’ includes the scholarship. For other purposes, the scholarships are unearned income.
See: Table 8.Standard Deduction Worksheet for Dependents in https://www.irs.gov/publications/p501/ar02.html#en_US_2015_publink1000221069
This is the problem…it should not be this complicated!
The tax code is not intuitive. It is based on definitions that are not always consistent. Earned income can be defined as “X” under one section, and as “Y” under another. It is just the way it works, and why it is so complex.
Ok, so kiddo reports amount of scholarship that exceeds tuition/books/fees as.a NON-resident on Illinois state tax return… This same amount is also reported on kiddo’s Michigan state tax form, but we’ll subtract any tax paid to Illinois from amount owed to Michigan, to prevent getting taxed twice on same income. Rinse and repeat in succeeding yrs. Thank God one kid is majoring in accounting.
Does someone know this definitively? For regular taxes, isn’t there a substantial difference between monies in exchange for required work (eg, grad TA,) versus UG grants? We did not report the one year D2 received grants in excess of tuition. BUT that year, she did not qualify for AOTC. (We never reported any of this to the state the college is in.)
Much depends on how much, if any, other income the student may have. For many students without much income, classifying their grants/scholarship as “taxable” to the student, means the student pays a trivial amount of tax, since they have the $6300 personal exemption. It then means you, the parent, who paid what you thought was R&B, instead what you paid to the school was tuition, so you qualify for the AOTC.
Monies received for work are taxable. UG grants are not taxable if applied to tuition, fees, but taxable if used for R&B. The choice is up to the student, unless the grant/scholarship is restrictive and specifies it was only for tuition.
How long ago was this - if <3 years ago you and your D could still file an amended return, form 1040X, she could pay a few bucks in tax while you could get a bigger credit for the AOTC.
Scholarship aid in excess of your Cost of Attendance is taxable. The student is taxed. You will receive a form from your university that lists your total scholarship and grant aid and total COA.
The reality is that this is rarely an issue as few universities give grand aid in excess of the COA.
@excanuck99, this is not correct.
Scholarships and grants in excess of QEE (qualified education expenses, tuition, fees and books) are taxable income to the student.
Not in excess of COA. COA often includes transportation and personal expenses and those along with room and board are non-qualified expenses.
@excanuck99 I don’t think any university gives merit/grant aid over COA BUT many students have stackable out side scholarships. If they are getting free tuition and books from the university pretty much every thing else is not a QEE and that scholarship money is taxable to the student. Still haven’t been able to wrap my head around if it’s considered earned income and taxed at the students rate or unearned and kiddee taxed at the parent’s rate but so far in our personal situation I think our D’s outside scholarship will be considered “unearned income” and taxed at out rate. I really think it’s unfair to put our tax rate on our child but that’s they way it looks to me.
We just did our taxes Sunday. The scholarship above and beyond tuition was taxed at ds2’s rate.
I don’t believe a college can give scholarship beyond COA. With ds1, we were at a school that already had been quite generous to him. While we were doing a personal tour, they came up with MORE money. By the end of the tour, they had to take most of it back because they realized that it, along with our Pell, would exceed COA.
You might want to report the full amount of a scholarship and/or award in your son or daughter’s income to enable you to get the AOTC at the full credit amount. Your S or D is usually in a lower tax bracket and as long as they report the full amount of the reward in their income you don’t have to worry about the difference between the award and the tuition costs. Let me use an example. Let’s say the tuition is 15 and the award is 12. If you report the difference in the S and D’s income that might mean you won’t get the full amount of the AOTC. You want to get the full AOTC so you could report a little more as income that just the differential and … get the full AOTC on your tax return which is at a higher tax bracket, usually, and thus more beneficial.
Yes, the entire tax code and regs should be burned and buried and never mentioned again.
That’s what we did.^^^^
I honestly think they are playing a joke on all of us. Whoever is on the committees that write the IRS code and regs could not possibly be serious. It has to be a big joke because they are in power and literally don’t care what we think. Anyone who thinks government works and/or is really doing what is best for the people … just try to complete a complicated tax return. You will be in tears. You will wish for death. You will want to quit everything and move to a deserted island. Whatever you pay your accountant, and they need not be a CPA, it is worth it to avoid the whole mess. I just read an article today about retirement planning in terms of the order of the funds you withdraw once you retire between tax free, taxable and I forgot the third category. It is insane how complicated it can get and it shouldn’t be that freaking complicated. It just shouldn’t.
https://apps.irs.gov/app/IPAR/screen/IPAR_1/en-US/summary?user=guest
@lookingforward, here is a tool that might help determine if a tax return needs to be filed. It goes back to year 2013.
H&R Block software entered it on line 1 of her 1040EZ with “SCH” in front of it and the total was that plus her work income. It did this after the interview process where it asked for taxable scholarships. She didn’t get a W2 and it didn’t ask for one.
Hmm, I know that H&R block used to guarantee their returns and if they messed up they would pay the difference and penalty. Many moons ago my mom used them when dealing with my grandparents estate they royal messed up the ME state taxes but they covered it. If they still do this it might be worth it to have them do d’s taxes since their take on scholarships is different from what I read.
I am not complaining because our D has an excellent opportunity and we’re are very thankful for her financial aid but tax wise it kind of burned her this year. She is an engineering major doing a 5 term co-op. She was in class spring and fall semesters of 2015 and received scholarships grants etc. totaling app. $42k, part of which was a scholarship for a trip overseas during spring break. However, they charged her spring 2015 semester in December of 2014. For the Spring of 2016 which might have evened things up a bit she was on her co-op term so there were no charges. In the end she received a scholarship for the entire year but only the tuition for the fall of 2015 counted towards her CEE. It ended up she had nearly $27k in income from her scholarships. Ouch.
@Ivvcsf, is your D at Northeastern, by any chance?
Purdue.
@scoutsmom If you child has stackable scholarships and is earning an income from them, he or she should be taxed. Very, very few students are in this situation.
@excanuck99 I am not saying she shouldn’t be taxed what I have an issue with is her being taxed at my tax rate. There seems to be some disagreement about if scholarships above QEE are subject to the kiddie tax or not. What I can find says it is, at least in our case. I’m not sure what you mean about earning an income but I don’t think it’s all that rare for students to have scholarship above QEE. I’m going to take @Ohiomomof2 advice and look into H and R Block.