<p>Are any of the following items taxable?</p>
<p>1) When you get a financial aid in the form of a scholarship, like the "Smith Family" scholarship for $3k for ABC University?</p>
<p>2) When a student applies for a scholarship through an organization and secures it for 2K?</p>
<p>3) graduation scholarship given out in high school?</p>
<p>Scholarships in excess of allowable college educational expenses are taxable. So if your student uses their scholarship for tuition, fees, books or other allowable educational expenses no taxes. If used for room/board/spending money…then taxed.</p>
<p>who’s to say what the money is used for? At the end of the its really one big pot and you use it as its needed. Right? Or am I missing something?</p>
<p>You are required to report all scholarships to the colleges. In terms of aid awarded by the college, your child will receive a 1098T form for tax purposes. The scholarships will be listed as well as the allowable educational expenses. If the scholarships exceed the expenses, they are taxable. Things like books are not included in the expenses so keep receipts for those.</p>
<p>No, it’s not just one big pot. All 3 cases you mentioned are potentially taxable income to the student so they have to be allocated by the student either to qualified education expenses(tuition, mandatory fees and mandatory books and supplies) or to non-qualified expenses(such as room and board). If they are allocated to QEE and don’t exceed QEE then they aren’t taxable. If they exceed QEE, the amount in excess of QEE is taxable to the student. If they are all allocated to non-QEE it is all taxable. The exception to being able to allocate them is if the conditions of the scholarships require them to be used for QEE expenses. The reason to allocate them to non-QEE and have the student pay taxes on them is so the parents can take the AOC credit for that amount of tuition they pay. The credit in most cases is worth more to the parents than the taxes paid by the student.</p>
<p>Even if the student has taxable scholarships, if the student’s total income is less than $5800 then the student won’t have to file. That assumes the student doesn’t have more than $950 of unearned income. For federal purposes scholarships are treated as earned income.</p>
<p>Ok that definitely helps. But I still have a question.</p>
<p>When a kid gets a scholarship at graduation for $1000, who designates if that will be spent on room and board or tuition. To me its just extra spending money that will get used but where it goes could be 5 different places by the time its spent. (Thats what I meant by a big pot)</p>
<p>Same thing could be said for the scholarship that a college gives you. I’m not sure where its allocated I just know that when the bill comes due for $15k for the semester you subtract out the finaid scholarship of $1500 and then write a check for $13500. So again where is that money being allocated. Who knows? I would imagine thats up to the university. Certainly the bill includes room and board, so I would assume a prorated portion of the $1500 is going toward that.</p>
<p>But at the end of the day the $1000 from graduation and $1500 from finaid don’t exceed the tutiion. So does that make it not taxable?</p>
<p>OP,</p>
<p>to answer your question: unless the scholarship giver provides specific designation, the rule is qualified expenses are covered before non-qualified. </p>
<p>In the specific example you gave, it appears that both scholarships are non-taxable.</p>
<p>Thanks Lerkin. Thats what I thought but just wanted to be sure.</p>
<p>
Where did you get this information? I have never heard this rule. My understanding is that, unless the scholarship gives a specific designation, you can assign how the scholarship is used for tax purposes. IRS publication 970 even gives examples. It can be beneficial to do it this way because of education tax credits.</p>
<p>swimcatsmom,</p>
<p>aren’t we saying the same thing? Who in the right mind would first assign scholarship to non-qualified expenses? </p>
<p>My knowledge comes from taking Tax preparation classes and working for a CPA during tax season helping him with the tax prep for several years. I have not worked for CPA for couple of years, but I continue doing taxes in his office for my all my extended family (I need extensive features his professional software has for some of the returns) and I keep up with the changes in the tax code.</p>
<p>Some people choose to assign those kind of funds to non-qualified expenses so that they can apply what they did pay out of pocket towards qualified and thus qualify for AOC. There are scenarios where the money from AOC exceeds what the taxes would be for non-qualified expenses.</p>
<p>Lots of people in their right mind would assign it that way. Qualified expenses paid for with scholarship money are not eligible for the education tax credits. Paying for non qualified expenses with scholarship money does make it taxable income, but then enables you to take the tax credit. The tax credit more than offsets the tax paid on the scholarship. (all depending on individual circumstances of course).</p>
<p>I have done it that way for years and so do many CC members. IRS 970 shows examples of it, and there are some CPA publications out there that discuss this.</p>
<p>Swimcatsmom,</p>
<p>I understand what you are saying. I was answering OP’s question (and I also used my bias - because of the income limitations for the credit, the CPA’s clients I worked for would not qualify for the credit). I went back and looked at what I wrote and I should not have wrote it in such absolute terms.</p>
<p>
I don’t have that problem unfortunately :(.</p>
<p>I am reading avidly, MUST file today, and am as confused as when I started.
Who wants to do the taxes for me???</p>
<p>Seriously, I have to do this somehow.
Have 2 kids in college, very different situations, and seriously need a coach. Anyone wants to spare some time guiding me?</p>
<p>Are you doing taxes manually or using software? The software generally leads you through the education items pretty well. Sometimes though, the Q&As aren’t as clear as I would like. It always helps me to look at the actual forms to see what the software did with my Q&A answers to see if I answered them right.</p>