My daughter received a full scholarship. At tax time, we learned that the room and board portion is taxable at the parent rate. This came as a surprise to us so I want to notify others. It is covered in IRS Publication 970. We have a 529 for my daughter. I am trying to figure out if we can use the 529 to reimburse the taxes we paid. For this year, it was about $1,000 but it will be more in other years because we will have two semesters paid per year whereas this first year only included one payment. If anyone has information on this narrow issue, please help. We are grateful for her scholarship but unhappy that the government is taxing it, particularly at our rate, since it is her scholarship. Thanks!
No, taxes are not a qualified education expense.
But can’t you take a 529 distribution for the amount of the tuition (or other qualified costs) and not pay the 10% penalty, just the tax on the interest?
The possible taxability of scholarships/grants and the kiddie tax implications are discussed regularly in this forum. 529 distributions have to be taken in the same tax year as the qualified expenses were incurred/paid. And the same expenses can’t be used to make 529 distribution earnings tax-free that are used to make scholarships/grants tax-free or that are used to take an education credit. Chapter 8 of Pub 970 is about 529 contributions and distributions.
So amount she paid taxes on weren’t tax-free scholarships and could be paid from a 529 distribution tax-free but IMO you would have had to take the distribution in 2014. Taxes on scholarships/grants aren’t listed as qualified expenses for 529 distributions.
d will receive a form 1098-T from the school at the end of the year. one box will show the total amount of scholarships and grants. Another will show the amount that was billed for qualified tuition and expenses. If the former is greater than the latter, that difference is what she’ll have to pay taxes on. you’ll want to verify the numbers on the forms to make sure they are correct. no one likes paying taxes, but i’d rather her pay her $10 tax than lose out on thousands in grants.
Except that that’s incorrect. A student’s qualified education expenses include the amounts that were billed (which, as noted, may or may not be indicated correctly on the 1098-T) PLUS all amounts spent on books and other supplies that were required for specific classes.
Also, in future years, look into claiming the American Opportunity Tax Credit - you can use that money to pay your daughter’s taxes! (This has been discussed at length elsewhere, so do a search for “AOTC.” In short, the fact that her costs were fully paid by someone other than yourself does not mean you can’t claim the AOTC.)
Thanks for the ideas. Since my daughter is only a freshman, I will have these issues for 3 years. I will look into the AOTC and claiming portion that is taxed in same year.