Taxable Scholarships, Filing Status and FAFSA

[rgosula]

<p>Hi
Lets say a student's merit scholarship plus pell grant exceed tuition+fees+books for a certain year.
Lets call the excess amount = Scholarship+Pell-tuition-fees-books = TAX<em>SCHOL (for taxable scholarship)
TAX</em>SCHOL does not exceed $6100 (earned income limit to file taxes if you are a dependent)
TAX_SCHOL does exceed $1000 (unearned income limit to file taxes if you are a dependent)</p>

<p>In previous years, the student has been a dependent on parent's taxes.
I think student has 3 options for future years:
1 - Not be declared as a dependent on Parent's tax return
Not file a return since TAX<em>SCHOL < $10000 (income limit to file taxes as single)
Since TAX</em>SCHOL is not reported to IRS, it therefore does not need to be declared on FAFSA line 44d
Taxable student grant and scholarship aid reported to the IRS in your adjusted gross income.</p>

<p>2 - Be claimed as a dependent on parents tax return, but still file separate tax return.
report TAX<em>SCHOL on student's Form 1040:
line 7. Enter “SCH” and the taxable amount on the dotted line next to line 7.
report TAX</em>SCHOL on FAFSA line 44d.
Taxable student grant and scholarship aid reported to the IRS in your adjusted gross income.</p>

<p>3 - Be claimed as a dependent on parents tax return, without filing separate tax return
report TAX<em>SCHOL on parents Form 1040:
line 7. Enter “SCH” and the taxable amount on the dotted line next to line 7.
report TAX</em>SCHOL on FAFSA line 93d.
Parents' Grant and Scholarship Aid Reported in AGI</p>

<p>Number 1 seems like the best option, since TAX<em>SCHOL does not get reported on FAFSA. Is it a valid option?
Number 3 is second best option, since TAX</em>SCHOL gets reported as parents income instead of child's income. It would only be used if #1 is not a valid option, and TAX<em>SCHOL is considered earned income.
Number 2 is the worst option, since it has the worst financial impact, and amount of work for the student in filing a tax return. It would only be chosen if TAX</em>SCHOL is considered unearned income, and option 1 is not a valid option.
( I did not list an option 4 in which student files own tax return, without being a dependent on parents, since number 2 is clearly superior to it)</p>

<p>Couple of questions:
Is TAX_SCHOL considered earned or unearned income?
Can student choose option 1? And pretty much do nothing?
Can estimated "books" value by school be used, instead of actual?
What else falls in the category "supplies, and equipment"?
Any chance that if option 3 is chosen, that scholarships still need to be reported on 44d instead of 93d?
I don't think so, because since student is not filing taxes himself,
nothing is reported to the IRS on student's adjusted gross income.
Also if it is reported in 44d, it would get double counted since it is already included in parent's AGI.</p>

[Madison85]

<p>What is your concern regarding avoiding filing a tax return in order to avoid reporting taxable scholarships on the FAFSA form? Why does that matter?</p>

<p>Also, is the parent claiming the AOTC by shifting $4000 of scholarship/grant/pell money to pay for room/board instead of tuition? </p>

[MiddKid86]

<p>For the purposes of the “Kiddie Tax” (see IRS form 8615 instructions: <a href=“http://www.irs.gov/pub/irs-pdf/i8615.pdf”>http://www.irs.gov/pub/irs-pdf/i8615.pdf&lt;/a&gt;), taxable scholarships are considered unearned income. You need to determine whether or not the student will be required to file form 8615 before you go further with your analysis.</p>

[rgosula]

<p>@Madison85. Less income reported on FAFSA, better is next year’s financial aid. As long as the decision is legit.
Parent not claiming AOTC at all.</p>

<p>@MiddKid86 if taxable scholarships are considered unearned income as you say, then form 8615 would have to be filed and option 2 would have to be chosen over option 3.</p>

<p>Option 1 still looks like best option then.</p>

[MiddKid86]

<p>

@MiddKid86 if taxable scholarships are considered unearned income as you say, then form 8615 would have to be filed and option 2 would have to be chosen.

</p>

<p>I said that for purposes of the “Kiddie Tax” taxable scholarships are considered unearned income. One of the conditions that must be met to trigger the required filing of form 8615 is $2,000 in unearned income (includes taxable scholarships).</p>

<p>I believe that even if form 8615 is required, there is still an option to include the child’s income on the parent’s return (thus subjecting all of the child’s income to tax at the parent’s highest marginal rate).</p>

[rgosula]

<p>OK, more confused. Since TAX_SCHOL is probably < $2000. Then option 3 can be used?</p>

[4kidsdad]

<p>

3 - Be claimed as a dependent on parents tax return, without filing separate tax return
report TAX_SCHOL on parents Form 1040:
line 7. Enter “SCH” and the taxable amount on the dotted line next to line 7.

This is not correct. Children’s taxable scholarships NEVER report on parents’ tax returns.</p>

[4kidsdad]

<p>

Is TAX_SCHOL considered earned or unearned income?

It depends which pub you read.

@2013 IRS Pub 501

Table 2.2013 Filing Requirements for Dependents</p>

<p>unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust. Earned income includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants.</p>

<p>Standard Deduction for Dependents</p>

<p>For purposes of the standard deduction, earned income also includes any part of a scholarship or fellowship grant that you must include in your gross income.

</p>

<p>

@2013 IRS Pub 929

</p>

<p>Tax for Certain Children Who Have Unearned Income</p>

<p>Unearned income defined. Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually performed. It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, certain distributions from trusts, and unemployment compensation. Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).

</p>

<p>

@2013 IRS Instructions for Form 8615

</p>

<p>Unearned Income</p>

<p>Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

</p>

[annoyingdad]

<p>For the purpose of having to file a return, taxable scholarships are earned income. See pub 501. </p>

<p>

Earned income. Earned income includes salaries,
wages, professional fees, and other
amounts received as pay for work you actually
perform. Earned income (only for purposes of
filing requirements and the standard deduction)
also includes any part of a scholarship that you
must include in your gross income. See chapter
1 of Publication 970, Tax Benefits for Education,
for more information on taxable and nontaxable
scholarships.

</p>

<p>Page 3, IRS Pub 501:</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/p501.pdf”>http://www.irs.gov/pub/irs-pdf/p501.pdf&lt;/a&gt;&lt;/p&gt;

<p>Only interest and dividends can be reported on the parent’s return, taxable scholarships can’t be. See the Figure 1 flowchart:</p>

<p><a href=“http://www.irs.gov/publications/p929/ar02.html#en_US_2013_publink1000203800”>http://www.irs.gov/publications/p929/ar02.html#en_US_2013_publink1000203800&lt;/a&gt;&lt;/p&gt;

<p>But yes, for form 8615, taxable scholarships are considered unearned income.</p>

<p>Amounts entered on line 44d of the fafsa are subtracted from the student’s AGI in the fafsa formula to not penalize the student for taxable scholarships/grants.</p>

<p>Can’t use estimated book costs. Keep receipts, you need to have paid for them.</p>

<p>Required supplies might include things like chemistry goggles, required art supplies for an art class, an I-clicker if required etc. They need to be required by the class and don’t include general things like notebooks, pens etc.</p>

[4kidsdad]

<p>

Can estimated “books” value by school be used, instead of actual?

You should use the actual per the receipts</p>

[annoyingdad]

<p>Here’s the fafsa formula for 2014-15. You can see 44a - 44f being subtracted from AGI on page 10, item 34:</p>

<p><a href=“http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf”>http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf&lt;/a&gt;&lt;/p&gt;

<p>I think in almost all cases, option 2 works out best for the family as a whole. If you use tax software, run it both ways. Even if form 8615 is required, filing a 1040a for the student is not hard.</p>

[rgosula]

<p>@annoyingdad, you are not so annoying after all!</p>

<p>Your answer is the key answer here I was assuming reporting on 44d would have a negative impact, when in fact is has a positive(or neutral) impact, since is it subtracted from AGI(line 36) (which will be the same amount in 44d). resulting in a zero effect.</p>

<p>Furthermore the child still gets to be claimed as a dependent on parents tax return. And the amount of the scholarship probably does not get taxed at all since the child’s income is so low.</p>

<p>So now, I believe option #2 is the cleanest and most optimal solution.</p>

<p>thanks for all the answers.</p>

[annoyingdad]

<p>Even without 44d being subtracted from AGI, the student has a $6260 income protection allowance before it counts in the fafsa formula. See item 39 in the fafsa formula link above. And if your student is doing work study, any earnings from that or any need-based employment is subtracted out via question 44c.</p>

[rgosula]

<p>thanks again</p>

[cptofthehouse]

<p>Have the money from NCP be considered child support so that it gets reported on the FAFSA as custodial parent income. See if that is better than being given directly to student. It depends on the amounts and circumstances as to which is better, overall for fin aid. Student gets half of income over the protection level go directly to EFC. Parents generally run lower than that. But if it puts the parent over auto zero or other threshhold, better to go as student income.</p>

[Madison85]

<p>@rgosula That was my point in the first part of Post #1: no effect on FAFSA EFC from taxable scholarships.</p>

<p>Now let’s address my second point, so you haven’t been claiming the AOTC? Maybe you should have been and can amend prior year return (s). Did you pay $4000 each year or more out of pocket with non tax-advantaged dollars? (Non 529 or non Coverdell dollars)? Did your child have any other taxable income? </p>

<p>See IRS Publication 970.</p>

[rgosula]

<br>

<p>:D< </p>

<br>

[rgosula]

<p>OK, now my question is about state taxes.</p>

<p>Child’s permanent residence is in California
Child’s college in Massachussetts</p>

<p>Regarding the taxable portion of the scholarship declared on federal tax:</p>

<p>Should a California state income tax be filed just because of this?
Should the scholarship be declared on the state income tax?
Should the scholarship be considered to be “earned” in a different state?</p>

<p>complicated…</p>