Meals expensed from 529

[lsag02]

IRS Pub 970

Thank you. I have ever heard of anyone paying any income tax on any scholarship. My daughter has friends who got full ride in the same college. It means their scholarship covers everything from tuition, room and board and any fees. Since you claim that only tuition portion of scholarship is tax free it means other part that covers room and board and all fees such as library, transportation, computer, etc. is taxable. So does it mean these college kids have to pay rather sizable tax on $20k+/year portion of the scholarship that covers that non tuition portion of the term bill?

It is also very strange that if scholarship is taxable the college does not send my daughter any taxable document though it knows what kind of term bill expenses it covers.

[dcandmc]

I have ever heard of anyone paying any income tax on any scholarship.

From IRS Pub 970:

Tax-Free Scholarships and Fellowship Grants
A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.

A scholarship or fellowship grant is tax free only to the extent:
• It doesn't exceed your qualified education expenses;
• It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and
• It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship. For exceptions, see Payment for services, later.

Taxable Scholarships and Fellowship Grants
If and to the extent your scholarship or fellowship grant doesn't meet the requirements described earlier, it is taxable and must be included in gross income.

Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are expenses for:
• Tuition and fees required to enroll at or attend an eligible educational institution; and
• Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

READ IRS PUB 970. I don't mind answering your questions, but please, at least do a little bit of work on your own first, for your own benefit. Or go hire a trusted tax preparer/advisor. Your lack of basic understanding, apparent refusal to believe what I am telling you, and lack of initiative to consult trusted resources to which I have repeatedly referred you is disappointing.

[dcandmc]

My daughter has friends who got full ride in the same college. It means their scholarship covers everything from tuition, room and board and any fees.

A scholarship that is used to pay for room and board must be reported as taxable income.

[dcandmc]

Since you claim that only tuition portion of scholarship is tax free it means other part that covers room and board and all fees such as library, transportation, computer, etc. is taxable.

No, I have not claimed this. Go back and read my recent posts. Some fees paid by scholarships are qualified education expenses (as that term applies to scholarships), and the scholarship dollars used to pay these fees are therefore not subject to tax. Other fees are not qualified education expenses (as that term applies to scholarships), and any scholarship dollars used to pay these fees are therefore reportable by the scholarship recipient as taxable income.

READ IRS PUB 970. Have I been clear enough about this?

[lsag02]

I read the publication twice. But I am not a CPA or a financial professional so I may not interpret it correctly.

It seems from this publication that portion of the scholarship that covers room and board is indeed taxable. So if a poor kid who has no income whatsoever got full ride scholarship that covers everything including room and board and all other fees. Say R&B is $20K, so does it mean he or she owns $2K in federal taxes alone if say tax bracket is 10%? Where does this poor kid who has no income will take $2K to pay this scholarship tax?

[dcandmc]

I read the publication twice. But I am not a CPA or a financial professional so I may not interpret it correctly.

It seems from this publication that portion of the scholarship that covers room and board is indeed taxable. So if a poor kid who has no income whatsoever got full ride scholarship that covers everything including room and board and all other fees. Say R&B is $20K, so does it mean he or she owns $2K in federal taxes alone if say tax bracket is 10%? Where does this poor kid who has no income will take $2K to pay this scholarship tax?

Wow. Where to begin. I guess the poor kid could, in fear of incurring a $2k tax bill, turn down the $20k scholarship that would pay for room and board. That means the poor kid would either pay the $20k room and board bill out of pocket to avoid the $2k tax bill, live at home while attending school, or just not go to college. Wait, how about this: the poor kid could get a job (crazy idea, I know) to pay the $2k tax bill and earn money for other expenses.

In reality, if the $20k taxable scholarship is the only taxable income that the poor kid has, the tax bill will very likely be less than $2k. First of all, since taxable scholarships and fellowship grants are considered earned income when calculating the federal standard deduction, the amount of that $20k actually subject to tax after the 2021 standard deduction for a single tax dependent is applied will only be $7,450. Second, the kiddie tax (IRS Form 8615) may come into play, so that must also be taken into account.

But really, if the poor kid ends up earning money from a work study job that pays only $10/hour for 5 hours/week during the academic year, that should cover any tax bill owed because of the $20k scholarship (and the work study income, too). I can think of a lot worse things that might befall the poor kid who is given a full ride scholarship but, alas, must work 5 hours a week to foot the tax bill.

[Mark_Kantrowitz_SFC]

The taxability of scholarships is a real problem for some students, since they need to work longer hours or borrow more to cover the cost of the taxes on their scholarships.

For example, the earnings from Federal Work-Study jobs are usually intended to pay for college costs, not the taxes on scholarships, which is not a qualified expense. If the student does work a second job, it can negatively impact graduation rates. (A student who works a full-time job is half as likely to graduate with a Bachelor's degree in six years as compared with a student who works 12 hours or less a week.)

This problem has been getting worse. According to IRS data, a total of $3.4 billion in taxable scholarships was reported by more than 800,000 taxpayers in 2018, up from $325 million and 44,000 in 2015.

Scholarship providers have been urging Congress to repeal the tax on scholarships, so far without much success.

[lsag02]

Thank you. I am really surprised why tuition is treated differently than R&B for tax purpose. And it makes no sense to require a student to pay income tax on the portion of a scholarship that is effectively not an income.

[lsag02]

I am also surprised that college does not send student any tax form indicating portion of the scholarship is taxable similar to 529 sends the tax form for all withdrawals.

[dcandmc]

This problem has been getting worse. According to IRS data, a total of $3.4 billion in taxable scholarships was reported by more than 800,000 taxpayers in 2018, up from $325 million and 44,000 in 2015.

From 2015 to 2018, a three year period, the amount of taxable scholarships reported to the IRS increased more than tenfold, and the number of taxpayers reporting taxable scholarships increased more than 18 times? In three years? If these numbers are correct, I would say it's a nice problem to have. More free money (a lot more, it appears) is being made available for students to better afford a college education, in this case those higher education expenses that are not considered "qualified" by the IRS in terms of the taxability of a scholarship. Which is the larger problem for a student - not having nearly enough money to pay these expenses, or being handed 90% +/- of the cost with no strings attached (other than funding the other 10%, represented by the tax liability)?

[Mark_Kantrowitz_SFC]

Colleges and scholarship providers are not required to provide any tax forms when the student receives a scholarship.

Colleges are required to send the student an IRS Form 1098-T, but that isn't the same thing and it only reports scholarships that are awarded by the college, not third party sources, and it does not specify whether the scholarships and grants are taxable or not.

[dcandmc]

I am also surprised that college does not send student any tax form indicating portion of the scholarship is taxable similar to 529 sends the tax form for all withdrawals.

The 1099-Q provided by 529 administrators does not at all indicate how much of a 529 distribution (if any) might be taxable. As with scholarship money received, it's up to the taxpayer to make that determination and correctly report any taxable amount to the IRS. The 1099-Q only reports how much was distributed from the 529 over the tax year, and how that amount breaks down between basis (contribution) and earnings.

[dcandmc]

Thank you. I am really surprised why tuition is treated differently than R&B for tax purpose. And it makes no sense to require a student to pay income tax on the portion of a scholarship that is effectively not an income.

Right, it's not an income like one would earn from working at a job. But there are lots of things that are subject to income tax that aren't like wages from working at a job: interest from a bank account, investment earnings, a profit from selling a vacation home, etc. The policy decision made here was that scholarships that pay the direct costs of receiving an education, namely tuition and academic related fees, are to be encouraged, while scholarship dollars that are used to pay normal living expenses (room and board) are not likewise favored. After all, those expenses would presumably have to be paid by someone anyway, so scholarship dollars used for room and board replace dollars that would have been spent and now can be saved or used for a different purpose. You can see the difference, right?

[Mark_Kantrowitz_SFC]

It is a tenfold increase in the taxable portion of scholarships, not a tenfold increase in scholarships.

Scholarship recipients do not have more money to pay for college, but rather a greater number of scholarship recipients are paying taxes on their scholarships.

It is unclear why this is happening, but it does mean that more scholarship recipients are unable to make full use of their scholarships because their scholarships are taxed.

The data comes from the IRS Statistics of Income, which are estimates based on a randomized representative sample of actual federal income tax returns.

Scholarships are the only form of generosity that is taxable to the recipient. If I give money to a soup kitchen or homeless shelter, the benefit is not taxable to the recipient. But, if I give money for college room and board, it is taxable to the recipient.

Most members of Congress are not aware that the federal government taxes college scholarships and grants.

[dcandmc]

It is a tenfold increase in the taxable portion of scholarships, not a tenfold increase in scholarships.

Understood; when I asked about the three year delta in my previous post, I used the term "taxable scholarship."

Scholarship recipients do not have more money to pay for college, but rather a greater number of scholarship recipients are paying taxes on their scholarships.

I don't know; if there has been a huge increase in reported taxable scholarships from 2015 to 2018, it's hard not to think that more money is being offered in scholarships. After all, I think it's safe to assume that all of the qualified expenses (primarily tuition) will be fully covered before scholarship dollars are shifted to non-qualified expenses like room and board. You say it's unclear why this (the huge increase in reported taxable scholarships over a three year period) is happening. Do you have any educated guesses?

Scholarships are the only form of generosity that is taxable to the recipient. If I give money to a soup kitchen or homeless shelter, the benefit is not taxable to the recipient. But, if I give money for college room and board, it is taxable to the recipient.

This is comparing apples to oranges. Donating to a charitable organization (most likely a 501(c)(3) entity) as a means to assist a certain segment of population is not nearly the same as providing scholarship money for room and board at a college or university, especially when the scholarship is based on merit and not need.

[lsag02]

As Mark said you can donate to a food bank and everyone regardless of income can come and eat there and not get a tax bill for this meal. While meals at college paid for by a scholarship are taxable. Both tuition and R&B are inherent cost to attend a college, there are no difference in them, they are part of the same term bill a student needs to pay. It is very bad idea to ask a student to pay taxes on the benefit which is effectively not an income, the student does not get cash from scholarship, it is different from rental income or proceeds from selling a house when one receives cash proceeds and therefore has income to pay that tax. Whether the scholarship is income based or merit based is irrelevant, what is relevant is student income to pay this tax. If student has no income there should be no tax.

[Mark_Kantrowitz_SFC]

There has been no increase in the total amount of available scholarships.

There may have been an increase in awareness of the need to report taxable scholarships.

Colleges are tax-exempt charitable organizations, and scholarships are usually targeted based on financial need. So, your argument that it is an apples-to-oranges comparison falls flat.

College scholarship providers have said that they do not provide scholarships for room and board because of the tax implications. It's not just because of the potential tax liability for recipients, but also because of the potential for excise taxes (e.g., for private foundations) if they were to give money that did not satisfy the definition of a qualified scholarship under 26 USC 117.

[dcandmc]

As Mark said you can donate to a food bank and everyone regardless of income can come and eat there and not get a tax bill for this meal.

How many people who can afford to buy their own groceries or eat out at a restaurant visit a food bank or soup kitchen for their sustenance? Food banks and soup kitchens have enough difficulty meeting the demands of the financially disadvantaged. Yes, "everyone regardless of income can come and eat" at a soup kitchen, but in reality this does not happen and if it did it would be unsustainable in very short time.

Both tuition and R&B are inherent cost to attend a college, there are no difference in them, they are part of the same term bill a student needs to pay.

No, tuition and room and board are not both an inherent cost to attend college. Millions of students attend college every year without being billed for room and board by the school.

It is very bad idea to ask a student to pay taxes on the benefit which is effectively not an income, the student does not get cash from scholarship, it is different from rental income or proceeds from selling a house when one receives cash proceeds and therefore has income to pay that tax. Whether the scholarship is income based or merit based is irrelevant, what is relevant is student income to pay this tax.

If the student or parents would otherwise pay for food and a place to live for the student, then when a scholarship is received that covers room and board, that's extra money in the pocket of the student or parent. So yes, in an indirect way, the student (or a parent) does get cash from a scholarship that pays for room and board. And this is especially true if the scholarship is based on merit and not need. Example: a student from a wealthy family receives a merit scholarship that covers 100% of the college's cost for room and board, which is $15,000 for the academic year. Because the scholarship was received, the student (or parent/s) has $15,000 to spend on something else, or to keep invested or in a bank account, because the merit scholarship is covering the room and board expenses.

[lsag02]

How many people who can afford to buy their own groceries or eat out at a restaurant visit a food bank or soup kitchen for their sustenance? Food banks and soup kitchens have enough difficulty meeting the demands of the financially disadvantaged. Yes, "everyone regardless of income can come and eat" at a soup kitchen, but in reality this does not happen and if it did it would be unsustainable in very short time.

There are numerous footage of long lines of expensive cars riving through a food banks to get a $2.50 bag of potatoes. however these people who can afford to pay tax do not get tax bill.

No, tuition and room and board are not both an inherent cost to attend college. Millions of students attend college every year without being billed for room and board by the school.

There are millions of students who do not attend school at all. R&B are in many cases inherit cost of attending a college and getting a degree. If you live far enough to commute you must live on campus and eat something. And if you do not have income or ability to borrow this becomes an inherit cost of getting a degree together with cost of a laptop and other basic fundamentals.

Tuition that is treated separately for tax purpose is no different than any other fees including R&B for students who have to live on campus.

If the student or parents would otherwise pay for food and a place to live for the student, then when a scholarship is received that covers room and board, that's extra money in the pocket of the student or parent. So yes, in an indirect way, the student (or a parent) does get cash from a scholarship that pays for room and board. And this is especially true if the scholarship is based on merit and not need. Example: a student from a wealthy family receives a merit scholarship that covers 100% of the college's cost for room and board, which is $15,000 for the academic year. Because the scholarship was received, the student (or parent/s) has $15,000 to spend on something else, or to keep invested or in a bank account, because the merit scholarship is covering the room and board expenses.

You fail to realize that merit scholarship is given based on merit, not need. There are many very poor students who get merit scholarship. In fact in my daughter's school most kids who got presidential scholarship that is completely merit based for a full ride are poor kids. There is one kid who has three siblings and a single mother. She could not even afford school trip and community paid for her trip. If you worry so much about R&B being taxable at least you need to take into account student and parents income, not the fact it is merit.

[dcandmc]

There are numerous footage of long lines of expensive cars riving through a food banks to get a $2.50 bag of potatoes.

So because there are "expensive" cars in a food bank line, that means the car occupants can easily afford to go to a grocery store and buy the food that they are waiting in a long line to get? There is no logic in that argument, and you have no evidence to support you other than the theory that driving an expensive car = financial ability to easily afford groceries. Maybe that expensive car is a day away from being repossessed and the electric service was just disconnected at home for failure to pay the power bill. If you had the means to buy a $2.50 bag of potatoes, would you willingly wait in a long line to get the same thing for free?

There are millions of students who do not attend school at all. R&B are in many cases inherit cost of attending a college and getting a degree. If you live far enough to commute you must live on campus and eat something. And if you do not have income or ability to borrow this becomes an inherit cost of getting a degree together with cost of a laptop and other basic fundamentals.

Tuition that is treated separately for tax purpose is no different than any other fees including R&B for students who have to live on campus.

Eating food and having a place to live are not inherent costs of attending college and getting a degree; they are inherent costs of basic living that must be shouldered whether a person is in college or not. Paying tuition to attend college is fundamentally different because this is not an inherent cost of basic living. Surely you see the difference.

You fail to realize that merit scholarship is given based on merit, not need. There are many very poor students who get merit scholarship. In fact in my daughter's school most kids who got presidential scholarship that is completely merit based for a full ride are poor kids. There is one kid who has three siblings and a single mother. She could not even afford school trip and community paid for her trip. If you worry so much about R&B being taxable at least you need to take into account student and parents income, not the fact it is merit.

I have shepherded multiple children through college. Your statement that I "fail to realize that merit scholarship is given based on merit, not need" is insulting. And if at your daughter's school "most kids who got presidential scholarship that is completely merit based for a full ride are poor kids," it makes me think that in this particular case, there is a need component to these scholarships that you are not aware of. In any case, in the example I previously provided the student came from a wealthy family where the scholarship covering room and board was in no way related to need and resulted in the wealthy family having an extra $15,000 that they didn't need to spend on a dorm room and a meal plan. And, student and parent income is taken into account in determining to what extent a taxable scholarship is taxed.

If you have an issue with scholarships being taxable if they cover certain expenses, your beef is with the federal government and not me. I suggest that you contact your U.S. representative and/or senators to express your displeasure. Your time and energy are being wasted here if one of your goals is to affect any change in this matter. Arguing with me here and demonstrating your lack of awareness does you no favors and gets you nothing.