Son owes over $1,000 income tax on scholarship $ he received in excess of qualified expenses. Problem is, these scholarships covered his R&B, so he does not have cash or liquidatable assets. Can he get a student loan to pay the tax? I have read that one can only get a loan for the amount of tuition/fees minus scholarships/grants. If this is true, he would not be able to get a loan at all. I just don’t believe it, though. This is just for 1 semester, so next year will be at least double. How do low-income students manage to pay their taxes? THANKS!
if S is a dependent, are you sure the calculation is correct? was the form 8615 used? usually no tax is incurred as long as the amount of unearned income is less than $2100.
He should be able to get an unsubsidized Direct Loan.
If the student is low income, are parents low income as well?
Did the student have other income besides the scholarship income? His standard deduction if parents can claim him as a dependent on taxes is up to $6300.
How much was the room and board for one semester? It should not be more than maybe $7,000.
How does he owe so much taxes on the taxable scholarship income, is that federal and state tax?
If you did not do it already, you can shift some of that R+B scholarship over to income and pay for QEE by declaring it as income on your son’s tax return, so that the parent can claim the AOTC educational tax credit,which is ok as long as the scholarship is not explicitly to be used only tuition/QEE(rare, usually the scholarship is the “equivalent” of tuition/R+B, etc and is applies to the total amount owed on the student’s college account.
The idea would be to use the AOTC received by the parent to offset taxes owed by the student. Your son will pay income tax on the shifted scholarship, usually at a low rate, if at all, but this strategy would allow you to claim the AOTC education tax credit. Instructions on how to best do this have been added to IRS pub. 970, with the idea that students who receive full-rides, even with Pell and institutional grants, can use the AOTC to help offset any income tax owed by the students on the non-QEE amounts.
The first $1000 of the AOTC is a refundable tax credit which you can receive even if you owe no tax, with the second $1000 refundable dollar for dollar of QEE paid, if you paid at least that much in taxes. The last $500 of the credit can be earned from 25% of the next $2000 of QEE paid. To get the full credit, you would need to shift $4000 of non-QEE expenses to income on your student’s return, which would allow you apply need-based grants/scholarships to the QEE. You would need to determine what you can claim and also whether it makes sense to claim the entire AOTC or just part of it, since your student must pay taxes on the amount shifted to income, and it is also subject to kiddie tax at the parents rate (form 8615, mentioned above), it may not make sense to claim all of it, particularly the last $500 which is reimbursed at 25%.
link to a helpful fact sheet about scholarships/pell grants/aotc: http://www.irs.gov/pub/irs-utl/Pell AOTC 4 pager.pdf
link to pub. 970, which shows examples: http://www.irs.gov/pub/irs-pdf/p970.pdf
link to Q & A about aotc: https://www.irs.gov/uac/American-Opportunity-Tax-Credit:-Questions-and-Answers
The calculations involved can be a bit tricky, but are worth the trouble. You also need to be aware that the amounts filled in on the tax return will not match amounts on the 1098T forms received from the college(from the shifting of part of the scholarships used from QEE to income, also costs for books, equipment, laptop and the like are not included on the form) and that is ok, just keep a copy of your calculations for your files.
I use have used the HR block software for my tax returns and this year, there was new info./questions for handling this process, other tax software probably has it too.
Just realized I made an error in the first paragraph - you would be shifting some of the scholarship applied to tuition/QEE over to income, since the R+B is already considered taxable as unearned income.
By not spending all the scholarships.
He should be able to get a student loan for the cost of attendance amount less the total FA he’s received. So if COA is $65k and he received $60k in scholarships, he should be able to get $5k in student loans.
He can easily have $1000 in taxes owed. If he received $15000 in room and board and has any additional income, say $2000, then he’s paying taxes on over $10k, some at the parents’ rate. I haven’t done my daughter’s taxes yet, but I expect hers to be about $1500, and she’ll use the overage from the student loan for that (that’s why we saved it from the fall).
Low income D1 football players will have pretty big tax bills this year. If they qualify for Pell, they’d have $5800 plus the stipend (between $4000-6000), plus r&b, so paying taxes on $20k of unearned income. Those who don’t know to save $2-3k will be in trouble.
Typically, low income students don’t have to pay much in taxes because the amount that is not QEE and is covered in grants is quite low.
others can chime in…if a student has no other income, and has $5000 in non QEE grants, would he/she pay any taxes on that amount? At what point are students charged taxes?
You mention that you’re low income. What is your tax rate?
did your child get ANY student loans this year? If so, what did those cover?
As to your question…most low income students work during the school year and during the summer to help pay any taxes that they owe.
If your child owes taxes, then don’t file until April 15th…and in the meantime, have your child get a job.
What is your EFC?
If your child’s aid does not cover the entire COA of the school, and he hadn’t borrowed his max for the year, then he could borrow.
What paid for his books? Grants? loans? Work study?
Assuming that the student is a dependent claimed on their parents tax return, on their own tax return they receive only the standard $6300 deduction, so only pay tax on their income which is over that amount(earned+unearned). For calculating the kiddie tax, the first $2100 of the unearned income(if no investment income, this would be the unearned scholarship income) is exempt from the kiddie tax, but over that is taxed at the higher rate of either the student or parents.
@mamag2855, I don’t think this is correct.
My D had $1175 of scholarship income that exceeded the $6300 standard deduction. This amount was lower than $2100, but the whole amount of this ‘net unearned income’ was added to our taxable income to calculate the kiddie tax.
Since we also had a pretty low tax bracket of 15%, it only resulted in a total tax of $180.
That is why I questioned the accuracy of the tax he is owing.
If the parents are also in a lower tax bracket, a few thousand over the standard deduction would not result in a $1000 kiddie tax.
@twoinanddone, OP said that is was only one semester worth of room and board scholarship!
If he had no other income then the scholarship would have to be over $10,000 for just one semester -$6,300 = $3700 at 25% tax rate to arrive at $1000 tax due.
Where is room and board $20,000?
In our case we were able to claim AOTC on books and fees, tuition scholarship covered tuition (tax free) and room and board scholarship was taxable to my D.
@imrenee1, did you have to pay for any books or tuition/fees out of pocket?
How much was the scholarship for room and board for one semester?
@mommdc I was trying to convey what you stated but did not do a very good job, thank you for clarifying.
I am also unsure about where the OP’s $1000 income tax owed comes from, or whether the kiddie tax was considered. Maybe the OP can post more details.
@mamag2855, I know the specifics of kiddie tax are hard to explain, I didn’t fully comprehend it until I saw the calculation on the 8615 form.
link in post #4 is incomplete, sorry!
link for the fact sheet on scholarships/pell grants and claiming the AOTC:
http://www.irs.gov/pub/irs-utl/Pell AOTC 4 pager.pdf
sorry, this link is not formatting properly when I cut and paste it
@4kidsdad he didn’t “spend” it; it was applied to his room & board. (Not optional.)
@mommdc Scholarships were $34676, $21,868 of which were QEE. R&B = 12,808
To the OP this is exactly what my son did. We estimated taxes would be over $1,000 and they ended up being $870. He took a loan in Fall. That loan represented the student contribution but in reality will go towards taxes as planned.
@mommdc We didn’t have to pay anything out of pocket. His books were also covered.