<p>Trying to wrap my head around taxes! I understand that scholarship money that is used for tuition, required fees, books and equipment is tax free and that scholarship money that is applied toward room and board is taxable and considered unearned income and taxed at the parents tax to the student. Is there any way around this? We have a 529 account for D (not as much in it as we'd like but better than nothing) and according to the 529 rules, room and board IS an approved expense. This is so confusing!</p>
<p>D16 is in a good position for a school scholarship (very likely NMF) that would pay tuition, fees and books plus about half the cost of room and board freshman year. She plans to apply for some small, local, one time, scholarships that are awarded to graduating high school seniors to use to help pay for room and board in sophomore through senior years of college. If she's lucky this would be about $5K total. It's my understanding that if she gets any of these awards they would be paid directly to the college and that the college will hold the money until it is needed. Does she have to pay taxes on this money the year it is awarded or does she pay taxes the year the funds are used? The scholarship from the school is a merit scholarship and she will have no need based aid and I know for certain that the school does 'stack ' scholarships.</p>
<p>I really don't agree that scholarship money used for room and board is considered "unearned" income, she's working her butt off for it! I can see requiring her to pay taxes on it but think it's really unfair that she has to pay at her parents' tax rate.</p>
<p>We have pretty much decided to start a small family business January of 2015 (something I've been toying with for a few years) and with the start up costs it should lower our tax bracket somewhat for a few years until we can turn a profit. We'll be meeting with a tax account and lawyer in January to make sure we have our i's dotted and t's crossed before proceeding but from what I've been able to find, the kids can contribute 100% of their salaries to their 529 accounts. Which brings me to another question, D16 will be attending a college out of state I know I will have to pay sales tax for products she sells in that state and I'm guessing since we will have a 'presence' in that state wel will have to charge a sales tax on items sold on line in that state too, but will she need to pay a state income tax? Our state does not have a state income tax, she will not be a resident of the state where she will be attending college. I hate taxes! To make matters more complicated, our county charges property taxes on all business assets (raw materials, display shelving, computers...) I hope we get a really good accountant, this is all making my head spin!</p>
<p>I think if you declared the scholarship money fro room and board as taxable scholarship, you could also withdraw her 529 to apply toward room and board too. </p>
<p>If your daughter uses scholarship money for non QEE, including room and board, it’s taxable. No way around it. If you use 529 money for R&B, it is not taxable. Since the tax is not 100% for anyone, it is always better to get free money and pay tax on it.</p>
<p>Say the cost of QEE is $20k and R&B is $12k; she receives $25k in scholarship and you pay $7k from 529 money. $5k from the scholarship will be taxable, but whatever is owed will not be $5k, so you are better off accepting that $5k in scholarship money. You should also be aware that under this scenario, you will not get any AOTC because you haven’t paid anything from non-tax benefited funds (the only amounts you paid was from 529 money, and that has already received a tax benefit).</p>
<p>Really, getting scholarships is a GOOD thing.</p>
<p>It is true that the scholarship amount that goes for room and board is taxable but it is considered “earned” income for the purposes of the standard deduction. It is considered “unearned” only for the purposes of the kiddie tax. So in the example twoinanddone gave, the $5,000 would go on the student’s return, but none of it would be taxable.</p>
<p>As mentioned above by 3bm103, taxable scholarship money is only considered unearned income for purposes of the kiddie tax, if that provision of the tax code comes into play (it might not). Also, there’s a threshold that must be met before the kiddies tax kicks in and subjects a child’s unearned income to tax at the parents’ highest marginal rate. You owe it to yourself (and your child) to have a good understanding of how all this stuff works. Yes, it can be complicated, but doing the wrong thing can have very unpleasant results. Consult a tax professional if necessary.</p>
<p>Thanks @Madison85
There won’t be any financial aid involved, only merit, so that shouldn’t be a problem. Yes, one idea we are considering is hiring D as a sales rep to help sell our products while she is in school. If this looks like it will be too problematic there are other jobs that she can do remotely not involving direct sales.</p>
<p>I know very little about finances and taxes, H has always handled all the finances, taxes, invests, bills so I may not have a clear understanding of things. I thought IRAs are for retirement not college and the 529 plan is for college. I see that you can withdraw money from an IRA for tuition books and fees but not room and board but you can withdraw money from the 529 plan for room and board. What I was thinking was that she will get a small salary which she will pay income tax on at her tax rate because it is earned income and them put it into 529 plan to use for room and board for the next year. Do I have this wrong or is their a better way to do this?</p>
<p>@MiddKid86 We are, without a doubt, contacting a tax professional! I’m just trying to get a grip on some of this stuff so I can at least ask some what meaning full questions. </p>
<p>Yes, an IRA is generally used for retirement savings and a 529 plan is designed for higher education savings. Madison 85’s post #4 has to do with the fact that you coupled a percentage of salary limit to 529 contributions, when there is no such limit. A limit does exist for IRA contributions, however.</p>
<p>Why wouldn’t the $5000 of scholarship in excess of QEE in my example be taxable income? If that is the only income the child had, it may all fall under the exemption amount, but it is still income and subject to tax (the tax may be $0). If the amount is $8000k in scholarship in excess of the QEE, some tax would be owed. </p>
<p>Yes. All income is taxable, but the amount of tax owed is different. If I earn $10,000 it is unlikely I’d owe any taxes because of personal exemptions and the standard deduction. It is still taxable income, and if I make another $30,000 in income, it’s added to that original $10,000 and I’ll owe taxes on the entire amount, even though the first $10,000 may have an exemption (it also may not, that’s why it all has to be considered income, and taxable).</p>
<p>I think it is important because the OP asked for tax advice, admitted she doesn’t know anything, and may now think that the $5000 is not taxable at all, rather than, if it is the only student income, no tax is due. I think she must look at it ALL as taxable income, and then figure out what the tax will be ($0 because of exemptions). It also sounds like this student works so may owe tax if her ‘pile’ of money is big enough.</p>
<p>My own child is in this situation, and will have to claim the excess QEE scholarship on her taxes. She may have to pay taxes on some of it. It is still better than not getting the scholarship money.</p>
<p>Well, I guess so, if you’re including stuff that has a 0% tax rate. But that’s like saying that the purchase of food is taxable at 0% in a state that has a sales tax but doesn’t apply it to food. It doesn’t make sense.</p>
<p>Earnings (unearned income) in a 529 account and a Roth IRA are not taxable if used in a certain way. Qualified dividends and long term capital gains (again, unearned income) are not taxable to those in certain tax brackets. Or, using your logic, you could say that they are taxable, just at a rate of 0%. But, in my opinion, it makes more sense to say that they are not taxable, and I don’t think that this is an incorrect interpretation.</p>
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<p>If the $5000 is the only student income, it is not taxable. Period. The student is not required to file a tax return.</p>
<p>In my opinion as a CPA, those items ARE taxable income (even if the rate is zero), and it is not accurate to describe, for example, qualified dividends as non-taxable income (to people in certain tax brackets).</p>
<p>You do need to get a good accountant to work with you on what you are planning to do with your business. As for scholarships, yes, anything over QEE is income that could be taxable. I say "could’ because it all depends upon how much your daughter earns. A dependent like your daughter can have certain amounts of income before it hits the taxable threshold. </p>
<p>But as others have said, better that she gets the scholarship and has to pay taxes on it, then gets no scholarship. She still makes out as you do overall. </p>
<p>There is a good deal of semantics at play here, but the above is not the best way to look at it. </p>
<p>In this discussion, there are no 0% tax rate items. All amounts of scholarships are income and taxable. The difference is that you can use a number of deductions to reduce or eliminate the taxes due. For instance, scholarships that cover tuition are still taxable income but subject to an equal deducations. Scholarships that cover room and board are taxable, but there are no equivalent deductions. In the end, the student finds him or herself with a pile of income and a pile of allowable deductions for education and a number of exemptions (depending on the filing status.) What remains represents the amount subject to taxes, but ALL of the income was taxable. </p>
<p>The 529 simply adds a layer of complexity, but it should not change the basic income - minus allowable deductions paradigm. </p>
<p>In my opinion as a CPA, taxable income is Line 43 of the 1040 (or whatever line it turns out to be for 2014).</p>
<p>Kid has gross income (“all income from whatever source derived”), but not necessarily taxable income. </p>
<p>There’s a technical difference between “person has income taxable at the 0% rate” and “person has no taxable income due to standard deduction and exemptions.” </p>