<p>Yes, my dd had to file a tax return for the first time last year in order to pay tax on her scholarships and financial aid. The tuition portion was not taxable, but the amounts that went toward room, board, books and fees were taxable.</p>
<p>All of the money was used for school-related expenses, but some of it definitely WAS taxable. Look for Publication 970 on the IRS web site for details.</p>
<p>Since then, we have been paying quarterly estimated taxes on her account so that she won't face penalties on this year's return.</p>
<p>Okay, so I got the 1098T today. That helps. So the college used Box 2 to declare the amount billed for qualified tuition and related expenses. In Box 5 they declared the total amount of scholarship money. If I subtract Box 2 from Box 5, I get roughly $5000. Okay, so that money is taxable, and as I understand it would go on my son's tax return as taxable income. (Please tell me if I'm not understanding this directly.)</p>
<p>On our (parents') return, we will put the amount we paid to the school in 2008, plus the cost of books, is that right?</p>
<p>In the CPA Journal article that jtennis linked it says books can also be counted by the student as reducing the taxable part of the scholarship:</p>
<p>"Taxability of scholarships. IRC section 117 excludes scholarships from gross income to the extent they are used for qualified tuition and related expenses, including required books, supplies, and equipment"</p>
<p>I suppose we could have my son pay the cost of the books and then he could deduct that from the $5000 of taxable scholarhip money if it helped with his own tax liability. (Then we --parents-- would not include the book costs in our total educational expenses on his behalf.</p>
<p>My big question now is this: The amounts the college put on the 1098T are for the total 2008-09 academic year. This was addressed in the CPA Journal article, but just for my own clarification, should we divide the figures in Box 2 and Box 5 in half? One half for the fall semester (which ended prior to the end of 2008) and one half for spring? And then declare the spring semester half on our 2009 taxes next year?</p>
<p>Next question: My son paid $1600 of his tuition cost out of his summer earnings, as per the expectation of the college for his expected contribution. On the TaxCut software it tells me he can't deduct tuition expenses if he is claimed as a dependent on someone else's tax return. Should we then, as parents, bundle that $1600 into what <em>we</em> paid since it was part of the expected family contribution?</p>
<p>I've been looking online--and I'll look up publication 970, but it seems most of what I find regarding the 1099 T involves whether or not you're eligible for the various tax credits and deductions available to parents who pay college expenses. I have not found anything about tax liability--and even the H and R Block rep that answered my question said it's not taxable--not that we can rely on that. It seems a little unfair. If they want us to pay taxes on it, then they should make it a lot easier to figure out what to do with it!</p>
<p>The IRS is very specific in IRS 970 about the rules regarding whether a scholarship or grant is taxable or not. If it is used to pay for tuition and fees and required books it is not taxable. If it is used for other expenses it is taxable. There is a little chart on page 5 of the publication. Several school related costs such as room and board do make it taxable.</p>
<p>Some of the tax programs are quite confusing in the way they handle the education expenses. Turbo tax asks for taxable scholarships under income, then you list the 1098 infor in another section, then it asks a weird question along the lines of 'should any part of the scholarships from the 1098 not be included in income'. I have a pretty good understanding of the IRS 970 rules but managed to put the wrong number there.</p>
<p>It really pays to take the time to read over the publication to understand your options and what different benefits may be available. I even have a spreadsheet for both kids to try and make sure we maximize the benefits.</p>
<p>Helen- I always use the 1098T as provided, I figure it is not worth my time to shift the monies paid to and from various tax years, better to have everything match and no questions asked.</p>
<p>If your kid has a 1098T with box 5 $20,000 and box 2 $8000, then you have to pay taxes on income of $12000 plus any other income.</p>
<p>On the books, on this forum, it seems the consensus is only required as purchased from the university, like lab manuals, should be deducted.</p>
<p>You may also ask your advisor if that income allows him to be independent, to lower his taxable liability.</p>
<p>Many thanks to the patience of all of you. :)</p>
<p>I just tried my best, and didn't try any clever reckoning to figure out what advantaged us better, or our son better. It's just too confusing for me.</p>
<p>On his tax return I've declared the amount of taxable scholarship he recieved (Box 5 minus Box 2). I did not split the totals by half for 2008 and 2009, since the second half was billed and paid prior to the end of 2008. This all leaves him owing $36. on his tax return. Not bad! (He'll be disappointed not to be getting any of the taxes withheld from his summer job pay checks... but he's getting so much free money from the college, he can't complain too much.) He does not get any breaks for the tuition money <em>he</em> paid directy to the college since he's a dependent on our return. (Next year I will just pay his part of the tuition bill directly to the school and let him pay us back for it at some point.)</p>
<p>On our parent taxes I declared all the money we spent on tuition and other mandatory fees paid directly to the college.</p>
<p>I'm not sure if I did all this right, but I did it in the simplest possible way. We end up getting a huge refund (we have two in college, but the second child's college expenses haven't ended up costing us much because she lives at home and got some scholarship money for tuition, plus a relative helped her out with some.) </p>
<p>For whatever reason, TaxCut wants to give us the Hope Credit for both kids, even though we didn't even spend that much on the second kid. That's the only thing that seems a little off. We spent only $509 for her for 2008 on qualified expenses, and that's all I declared as coming from us, although it did ask how much was paid by someone else (such as a relative), and I declared that amount too as coming from someone else. Nonetheless, TaxCut seems to lump the two figures in together and gives us the Hope credit.</p>
<p>Does this seem weird?</p>
<p>But, in any case, the mists are beginning to part. Hopefully I can be done with this and move onto the next great joy; two FAFSAs, a CSS Profile, and a variety of other required forms! ;)</p>
<p>Thanks Somemom, Swimcatsmom, and all the rest of you! I feel like I should be paying you 39.95 instead of H & R Block--although you'd have to split it evenly and then I'll be sending you a 1099 next year. :) Once again, CC has provided me with clarity.</p>
<p>Thank you, Swimcatsmom. I feel like I should send most of that 2nd Hope Credit money to my brother, who is the relative that contributed quite a bit to my daughter's tuition! Seems like he should be getting most of it and not us.</p>
<p>OK, you wonderful FA experts, what happens if the college didn't report all the scholarships/grants? S's NMF award and an external scholarship were not included in Box 5. Will colleges issue a corrected 1098? If not, how do we document? Are we SOL?</p>
<p>I just sat down and really looked at our 1098T (as opposed to just shoving it in my file for later) and I have a question. </p>
<p>In box 2, the school has reported tuition charges for the entire school year, which is correct since I had to pay for second semester in Dec. However, in box 5, they have only listed their FA scholarship for the first semester. It doesn't look like my D will have to pay taxes on the FA scholarship as it is less than the total tuition bill, but I wonder what the effect will be on subsequent years taxes. It seems like the year she finishes college she'll get a 1098T showing no tuition paid but scholarship money given for that last spring quarter. Does this make sense?? I'd like to just use the numbers on the form for taxes, but don't like the fact that tuition and scholarships are not given for the same time period.</p>
<p>YOU MUST pay taxes on scholarships for REQUIRED books unless you are REQUIRED to purchase them from the University as a condition for enrollment. That means if you can buy your books on ebay or any bookstore, then you MUST pay taxes on that money. this means that 99% of the time scholarships for required books are taxable. Stupid but thats how it works.</p>
<p>
[quote]
YOU MUST pay taxes on scholarships for REQUIRED books unless you are REQUIRED to purchase them from the University as a condition for enrollment. That means if you can buy your books on ebay or any bookstore, then you MUST pay taxes on that money. this means that 99% of the time scholarships for required books are taxable. Stupid but thats how it works.
[/quote]
</p>
<p>I don't agree. If you read IRS 970 the taxability of scholarships on page part 1 says that books can be used to make scholarships tax free if the books and supplies are required by all the students taking the class. Tax free scholarship rules on page 6 state:</p>
<p>
[quote]
Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
[/quote]
</p>
<p>The rule you are quoting is rule for the Hope tax credit and the lifetime learning credit - not for the tax free scholarships.
Hope rules on page 12 state:
[quote]
Related expenses. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
<p>
[quote]
Topic 421 - Scholarship and Fellowship Grants</p>
<p>If you receive a scholarship or fellowship grant, all or part of the amounts you receive may be tax–free.</p>
<p>Qualified scholarship and fellowship grants are treated as tax–free amounts if all the following conditions are met:</p>
<ol>
<li>You are a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regular enrolled body of students in attendance at the place where it carries on its educational activities; and</li>
<li>*Amounts you receive as a scholarship or fellowship are used for tuition and fees required for enrollment or attendance at the educational institution, or for books, supplies, and equipment required for courses of instruction.
*
You must include in gross income amounts used for incidental expenses, such as room and board, travel, and optional equipment, and generally amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant.
<p>Swimcatsmom,
I'm curious how you do your spreadsheet. I'm winding up with a spreadsheet-like tally with a column for tuition+fees (end of Hope credits), books/supplies (end of tax-free scholorships) room/board (end of 529 money), health insurance, transportation, other taxable income. The rows are the various sources of money. How do you work the information to find your best allocation?</p>
<p>A couple of clarifications. Books can not be counted as qualified expenses on the parents' taxes, but they can be taken off of the student's scholarship income if they have to file. Regular books can be purchased anywhere (amazon, ebay, etc) and unless the school requires that you buy them at their bookstore, they are not qualified expenses. From what I remember reading, if your student gets a full ride, you may not get a 1098 T form, and I don't think you have to pay taxes on it either. Not positive though!
Now if you are using a tax prep software ( I use Turbo Tax Premium), and you enter the figures from box 2 and box 5, you will then be asked what other qualified expenses you paid. My son has tuition and room and board, but we pay the fees, which are a few thousand dollars. At first it had me ineligible for lifetime learning and the tuition deductions (no Hope credit because of 3rd year) because it was automatically counting all of his scholarship money for the qualified tuition expenses in box 2. The school tells me that we pay the fees and it bills me exactly for the total of the general fees and technology fees which are qualified expenses. I had to recall how to show that I did pay qualified expenses out of my pocket.
This is my third year doing this, and even though I make notes to myself every year on how to calculate it right, I still get a headache and spend hours until the lightbulb comes on again! But I will give you this scenario to show you as simply as I can...
Box 2 amts. billed for qualified expenses 28,000
Box 5 scholarships/grants 33,000
Parents expenses that were qualified (fees): 3,000
At first it appears that there is an overage of $5000 that the student will have to report as income and the parent gets no deduction because the scholarship covered all of the qualified expenses. And I guess you could file it that way and pay the taxes on the $5000 for your student if they had to file. Whether they have to file or not also affects all of this, because they would not owe anything if that was their only income since the standard deduction for a single dependent person who is claimed on someone else's taxes is $5350. If they have a summer job or school job or any outside scholarships, that would all be added as additional income.
But for most people, the parent getting to claim the credit, especially the Hope or LL, or the tuition and fees deduction, outweighs what the student tax is. So the above scenario can end up like this:
Box 2 Qualified tuition billed: you put in 25,000 instead of the 28,000 from box 2 because you subtract the $3000 that you paid for a qualified expense (you are entering the amount of tuition that the school charged for the year)
Box 5 remains the same--33,000
When asked if you paid qualified expenses, you put in the $3000--it will calculate if you are eligible for the credit or deduction and which is best in your situation
BUT NOW YOUR CHILD's taxable income has increased from $5000 to $8000 because more of the scholarship is going toward room and board so his or her taxable income is not just the different between the 1098-T's box 2 and 5, it is more... It is now the different between what YOU put in for box 2 and box 5 after you calculated the tuition.
Then you add any of their income and outside scholarships and you can subtract book expenses so you make sure they save the receipts.
Most of the time the credit or deduction will be better for the parent even though you may have to pay more in taxes on the student if they have to file, which my son does because of a campus job that is not work-study plus his summer employment.
The 1098-T I receive does not accurately reflect how his scholarship is appropriated but by doing the calculation as described, it is correct. His scholarship covers full tuition and full room and board, and we pay all fees. So he basically should legally be paying taxes on his full room and board, not a partial amt. as it appears on the 1098-T.
The amount I entered for turbo tax from box 2 when you subtract the $3000 is actually the exact cost of 2 semesters of tuition if you look at your break-down of charges on your college's bill.
Confusing, yes! Already another headache trying to explain it. I hope it helps someone!!!
And remember, you are using a school year's expenses (Fall 2008 - Spring 2009) if box 7 is checked (and most schools require payment for spring in December anyway) which is not our January-January fiscal year. But that will make it work out for the 4th year--you will have a fall and spring semester to count with your year's worth of scholarship money. Sorry about the length of the post!</p>
<p>We still don't seem to be on the same page concerning the books issue but I'm going to indicate what we have done and see what everyone thinks. Our son is on full scholarship at the Univ. of TN. We as parents have paid nothing. He is a freshman and so has completed only one semester in 2008. His total scholarship was $9000 (box 5) and his amount for qualified tuition and related expenses was $3135. That leaves a difference of $5865, a bit over the standard deduction. Since he is in a lower tax bracket, we would prefer that HE pick up the "income" of $5865 (he did not work - that's ALL of it for the year). </p>
<p>I believe that means (and anyone correct me if I am wrong) that we would then not claim him on our taxes, thereby costing us the $3500 (exemption) X 0.25 (our marginal bracket) or $875. However, if we had claimed him, we would have reduced our income by $3500 for the exemption but increased it by $5865 for the scholarship. The difference is $2365, which X 0.25 = $591.25 (over and above the $875). Thus, it's best to let him file for himself since his taxes won't be anything close to $591.25 and maybe nothing if books qualify (books were close to $600).</p>
<p>Am I making sense? Thanks to all who weigh in on this.</p>
<p>You can still claim him as a dependent on your taxes. This would mean he gets the standard deduction ($5450 for 2008) but not the personal exemption ($3500). You would take the exemption ($3500) because you claim him as a deduction.</p>
<p>My personal opinion - Books qualify for the calculation of whether a scholarship is taxable as long as they are required for the course. it says so quite specifically in IRS 970.</p>
<p>
[quote]
Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
[/quote]
They do not count for the Hope Tax credit unless they are required and are required to be bought at the school.
[quote]
Related expenses. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
[/quote]
</p>
<p>The Hope and the taxable scholarships are two separate rules within IRS970. Every different tax benefit within IRS has different definitions of qualified expenses (for instance room and board is a qualified expenses for 529 accounts) but people mix up the requirements for one (Hope) with the other (scholarships). My 10 cents worth. </p>
<p>In the new rules for the 2009 & 2010 education credit in the stimulus package required books will be allowed so perhaps that will lessen peoples confusion.</p>
<p>Okay, my question is somewhat different--my d's scholarship is for full tuition & fees, so theoretically no taxable portion. She needs to file her own 1040 since her college fund has capital gains (what a joke this year!) She has no other income. Since her 1098T shows higher eligible expenses than her scholarship, I'm confused as to where I put the numbers. If I put her whole scholarship on line 7 (as per above), where do I put the offset of eligible expenses? Line 34 says use form 8917 for Tuition and fees deduction, but that doesn't seem to actually offset. And form 8917 says that the qualified expenses need to be offset by the scholarship. I'm confused and I'm a CPA! Does anyone have any insight to this?</p>