tax on merit scholarships

Want to make sure I have this correct. This is year 1, so we only have one semester of costs. Dollars will be different next year.

Year 1 total scholarship aid (most direct from school plus outside scholarships) of $14.5k. Qualified expenses of $6.5k (in-state tuition, fees, and books). Net of $8k is taxable income. Standard deduction of $8k offsets, so no tax due.

Year 2 total scholarship aid of $27k. Qualified expenses of $13k. Net of $14k is taxable income. Less $12k standard deduction is $2k, which will be taxed at my parent rate.

No AOC credit to anybody obviously because no net out of pocket costs.

Sound right?

Is semester 2 actually paid in December 2018 or in 2019? If the scholarship was disbursed in this calendar year, it is reported in 2018 taxes even if the classes occur in 2019. You should get a 1098-T with the correct amount to report.

Got the 1098-T yesterday. Only semester 1 was reported, so I guess semester 2 is considered disbursed in 2019.

That is good. You get a break this year. My son’s Spring tuition was due 12/15 so we got it all reported in 2018. Also, standard deduction goes up slightly in 2019. It will be $12,200 so you will be able to offset that amount next year.

I read on another thread that it’s not taxed at the parent rate anymore, but at the gift tax rate?

It’s taxed at the trust rate.

Yes, and $2,000 of taxable scholarships, after the standard deduction is applied, will result in $200 tax owed using the trusts and estates rates and brackets. (This assumes that there is no other income.)

Ah ok, trust brackets and rates apply. Got it.

Thank you!

https://www.irs.gov/pub/irs-pdf/i8615.pdf

Since his AGI was under $34,000 he should qualify for the free edition of Turbotax. Federal and state return should be free.

https://turbotax.intuit.com/taxfreedom/

Unless the rules have changed, you can declare (and pay taxes) part of the tax-free scholarship taxable in order to claim the AOC. Check Pub 970 for the current rules.

Merit scholarships are not taxed as they are not considered income. I am not an acountant but we have an acountant and were not required to pay taxes on my D’s scholarships. The article below is from 2018.

https://www.schwab.com/resource-center/insights/content/paying-for-college-are-scholarships-taxable

Merit scholarships ARE taxed if they are not used for QEE. What the scholarship/grant/financial aid is named doesn’t matter, it’s what it is used for.

Many merit scholarships are taxed, such as a full ride NMF scholarship that includes room and board. Athletic scholarships are taxed if used for room and board. Even Pell grants can be taxed if used for something other than QEE.

From your article:

https://www.irs.gov/help/ita/do-i-include-my-scholarship-fellowship-or-education-grant-as-income-on-my-tax-return

@swimmermom2

Not true. Sometimes merit scholarships ARE considered income.

If a scholarship is in excess of qualified educational expenses (tuition, fees, books), then it IS taxable.

It’s very possible your kid’s scholarship didn’t cover things like room, board, transportation, etc. OR maybe your kid’s scholarship was small enough that there was no tax liability.

@swimmermom2 merit scholarships used for non-qualified expenses like room and board and money for travel abroad ARE taxable.

From the article you quoted:

@thumper1 “It’s very possible your kid’s scholarship didn’t cover things like room, board, transportation, etc. OR maybe your kid’s scholarship was small enough that there was no tax liability.”

Yes! That was the case for us - the amount of the scholarship was less than the cost of tuition, r&b and books, which were qualifying expenses.

@swimmermom2 Room & Board are NOT qualifying expenses.

Just triple checking…financial aid is taxable as well using the same parameters correct? Anything over tuition, books and supplies, and fees?

@collegemom9

Loans are not taxable income.

But scholarships, grants are. And so is federal work study…but that is as earned income.