I don’t know of any specific cases, but any football player getting a full COA plus a stipend (or Pell grant), plus insurance would fall into the big tax picture.
A Stanford football player would be have to claim $16,400 for room and board, $5200 for health insurance, and ~$6000 as a subsidy, so $27,600. Standard deduction of $12k and that leave $15,500 as taxable. Ouch.
If a low income student gets a full ride that covers all COA they will also get an allowance for travel and personal expenses most likely (refunded to them). They will need to save some of that money for taxes.
Yes, not all of the net unearned income from taxable scholarships is taxed at 37%, it gradually goes up depending on amount.
I don’t agree with taxable scholarships being taxed like other unearned income of children. But it is what it is. At least there is a much higher standard deduction now. And paying a portion of the scholarship in taxes is still better than not having the scholarship that enables many low income students to attend college.
I absolutely agree with the fact that getting a full scholarship, room and board award is much better than not. The issue here is that the way this new tax rate does affect the lower income families was an unexpected outcome. They didn’t think it out. It doesn’t affect that many people.
The old kiddie tax on taxable scholarships was always a pain that hit up kids from low income families the worse because an unanticipated tax bill or any bill can cause a lot of stress when there is not the money to pay it.
That Stanford football player would owe over $4k on his scholarship. If he comes from a low income family as a number of full ride football players do, and his parents tax bracket was at the lowest level, he’d owe $1550. That’s a big difference and a problem as to where he’s going to get that money.
As part of the package, schools often help their full ride athletes with the pending tax bill, and taxes owed on the Taxable scholarships are included in the discretionary income part of the award. Or, they have part of that scholarship paid as a job, and they do work, usually in the athletic center and events setting where they get paid, and get withholdings. My one athlete son always assisted with track and other events that were not his sport and was paid for the work done. That can alleviate the tax bill as that is taxed as earned income, and can be s vehicle for withholdings
A problem is that the Congress, tax advisors, schools, let alone the athletic departments and the scholarship recipients and families, we’re not aware of hiwbthis changes the tax bill for students who are low income.
The whole treatment of college students is far more complex than it should be anyways. Many of the families are not doing it properly. IRS has attempted to crack down on this by having Due Diligence rules with penalties for verified tax preparer when calculating AOTC, but it’s still often done incorrectly.
Until a few years ago, the football athletes got tuition, fees, room & board, and books – and the meals and snacks were VERY restricted (players were hungry!). Now they can also get a stipend up to COA in D1 but it isn’t just any amount the school wants to give, it is the COA set by the university for all students, not unlimited amounts just for athletes. Travel is included in that COA. I’ve seen COA amount for instate and OOS students be different because of the travel, but I’ve never seen one include ‘money for taxes.’ Teams cannot (and never could) pay for personal travel (team travel is covered) or anything else, and now if they give the stipend (or a Pell grant), that becomes taxable too. Players can save their stipend to pay taxes, but the school can’t give more money on top of that.
Football and basketball players (and other head count sports) don’t qualify for work study hours because their entire COA is being met and work study would be giving them more than the COA. In the olden days, football players used to work in the summers and many got fluff jobs from booster, making many times minimum wage for doing nothing. That is all regulated now too.
I think many just don’t file taxes at all.
Thank you all for your comments. I just want to point out that it’s not just “super” low income or just “full ride” kids that were hit hard by the tax at trust rates this past tax year. For example, in my D’s case, she goes to one of the most expensive “meets full needs” schools and gets some partial financial aid toward her incredibly expensive room and board, we are not zero EFC. Her school’s COA is almost $80K per year. She has a set student contribution amount expected of her each semester and also a set amount of summer earning the school expects her to contribute towards her education.
Throughout the school year, she works at a job that is not paid through the school and is not federal work study, she doesn’t qualify for that and she doesn’t qualify for any Pell Grants. Her college allows students to do certain types of volunteer service jobs that benefit the community and relate to their majors for experience and in turn, the college gives her an additional grant for her expected contribution for the terms she works. Twice last year, she also did service trips abroad though one of the college’s own programs, once over winter break in Jan and then again in the summer. Her college again gave her a grant to cover her expected summer earnings student contribution plus gave her additional grants to pay for her airfare and also more grants toward her living expenses on both trips so that all added up to more “taxable scholarship income.”
It would have been so nice had the college just paid for the students’’ trips outright but that doesn’t happen. The students have to formally apply for these additional grants and it’s very competitive to receive any additional funding but it’s a real blessing if you are one of the lucky ones to get the additional grant. Without those grants, my D would not have been able to make the trips that were life changing and so meaningful for her. Many parents were surprised that their taxes were so high especially for kids who got “some” financial aid and additional grants for these types of trips. I don’t think any one of us could have imagined at the time what the tax implication were going to be in the future and were just so happy our students had these great opportunities to do great things. This summer, my D will be doing another service type of job, unpaid and also an unpaid, part-time internship and the school gave her a partial stipend for summer expenses and will give her additional grant money again toward her expected summer contribution earnings. This past semester, she had a lab class and there was an additional charge for that so again, more grant money. Our health insurance doesn’t cover her while away at college so her school gave her a grant for that, too. Health insurance is expensive, it runs about $3K, that is taxable, too and rises every year.
All of this adds up quickly so it’s easy to see how my D ends up having a large taxable scholarship amount and ended up paying so much in taxes. We knew all about the kiddie tax and were prepared for that but I kept thinking the new $12K figure was going to change things and save us but it just was as brantly described above:
The greater of: $1,050
OR
The individual’s earned income for the year plus $350 (maxed at $12,000)
Once the student’s taxable amounts start to climb so high, there are also the state taxes to pay as a nonresident in her college state plus taxes on any earnings she made in her home state on breaks, too. Then it’s also a matter of adjusting it all to see if she should claim even more as taxable income so we parents can take the AOC. We need the AOC to pay her expensive taxes and I was worried that the tax amount on her financial aid would almost be more than our EFC so how does that make sense? This year doing the taxes was so hard that I had to make an excel spreadsheet to figure it all out just to determine what amounts were taxable and how that coordinated with the AOC. This was my 6th year of doing it since D is my second kid and a rising junior so I’ve had some experience in the past. The thing I am most looking forward to when D graduates is never having to do taxes on scholarship income ever again!
Thank you to everyone who added information and comments. If this amendment passes, D will be doing an amended return, no doubt about that! We are SO grateful that her school is so generous but never imagined that the taxing of scholarships would change midstream just when I finally felt confident that I actually knew how to do them but I am so happy that it looks as if they will correct it. We may grumble over paying the taxes but we are so happy that D has had such amazing opportunities and she loves her school so no complaints about that at all. We can’t say enough great things about the generosity of her school and the things she has been able to do, it’s just amazing! I just think we are all allowed to complain about taxes, especially taxing financial aid.