Taxes on scholarships?

[itsjohnb]

I am getting ready to pay our first college bill and trying to coordinate scholarships, 529, AOTC, taxes, etc.

My son received some scholarships. I was told by the school that the scholarships are applied to the overall bill, and that I can decide how to apply the scholarships to the items in the bill.
My understanding is that scholarships are tax-free for tuition, fees and books. However, they are taxable for R&B.
Our expenses after scholarships this semester will be about $3500. I could consider this to be part of R&B to reduce the amount of taxes.
However, I want to get the AOTC, which cannot be used for R&B.
If I consider the $3500 out-of-pocket to be a part of tuition to claim AOTC, scholarships will cover all of R&B.

Does this mean that the full amount of R&B will be taxable income? To the student?

Thanks,
John B

[dcandmc]

Does this mean that the full amount of R&B will be taxable income? To the student?

Yes, under the scenario you provide, the full amount of the scholarship money used to pay for room and board would be taxable income to the student.

You mention 529 dollars as part of the mix. If you have 529 funds, you should consider designating this money as used to pay for room and board, which is a 529 qualified expense and could potentially decrease the tax hit.

[itsjohnb]

dcandmc,

Thanks for the reply.

My understanding is that AOTC is a greater benefit than 529. Like I said, our expenses after scholarships will be about $3500 for the semester. This is already less than the limit for AOTC. For this reason, I was not planning to touch 529 for direct school expenses at this time, although I was planning to use it for the two laptops that my son bought for school.
Using 529 funds would reduce my AOTC dollar-for-dollar. I could apply 529 funds towards R&B, shifting those scholarship dollars to tuition, reducing or eliminating out-of-pocket expenses and the ability to use AOTC.
Is it worth giving up $3500 of AOTC in order to keep $3500 off of my son's income? His tax rate should be rather low.

This semester is rather unique in that there is only one semester in which to use AOTC for the year, and my son received a couple of scholarships that are one-time or for several semesters. I expect to be able to use more 529 funds going forward.

[itsjohnb]

I just wanted to revisit this now that my son has received his 1098-t and I have some real numbers. According to the 1098-t, scholarships exceeded qtre by about $2400. After including the cost of books and some fees that weren't included on the 1098-t, the difference is about $1900. Is this the amount that would be taxable to my son?
I paid $4000 out of pocket and plan to claim AOTC. Since AOTC must be claimed on tuition, fees and books, and not on r&b, this will shift $4000 of scholarship to r&b.
So, this will result in $5900 in taxable income for my son? Am I figuring that correctly?

[dcandmc]

I just wanted to revisit this now that my son has received his 1098-t and I have some real numbers. According to the 1098-t, scholarships exceeded qtre by about $2400. After including the cost of books and some fees that weren't included on the 1098-t, the difference is about $1900. Is this the amount that would be taxable to my son?I paid $4000 out of pocket and plan to claim AOTC. Since AOTC must be claimed on tuition, fees and books, and not on r&b, this will shift $4000 of scholarship to r&b.So, this will result in $5900 in taxable income for my son? Am I figuring that correctly?

Yes, this all sounds right, but without seeing the billing statements and 1098-T and crunching all the real numbers, I of course can't give you a solid confirmation. It sounds like your son will probably need to file form 8615 ("kiddie tax"), because the taxable scholarship money received is considered unearned income for the kiddie tax, so have fun with that.

[itsjohnb]

Well, I did my and my son's taxes. I must admit that I didn't fully understand the tax implications and this was an eye-opening experience. I might not have played this as well as I could have, and I wanted to give some details in case it might help someone else.

As I explained above, my son's scholarships exceeded QTRE by $1900, and using $4K for AOTC resulted in $5900 of unearned income for my son. If it were just this, he would still be under the standard deduction and we would be fine.

However, he had $4100 in earned income last summer, for a total of $10K.

The first $2K of AOTC resulted in a tax credit to me of $2K, but a tax liability to my son of $324, for a net savings of $1676. That was a good use of out-of-pocket money, even if we didn't get the entire $2K.
The second $2K of AOTC resulted in a tax credit to me of $500, but a tax liability to my son of $387, for a net savings of $113. This was not a good use of out-of-pocket money.

We have not yet told my son that he will be paying $711 in taxes so that his parents can save $2500. My wife and I think that this is fair.

What could I have done differently? I probably should have limited the AOTC to $2K. The second $2K did almost nothing for us (when considering both our credit and our son's taxes), and I could have used $2K of 529 money instead of cash.
I also might have considered skipping the AOTC for 2017. The AOTC can be used for four years, but four years of college represent five calendar years. As tuition rises and some of his short-term scholarships expire, his unearned income will be reduced. He may not get as lucrative of a summer job, either. It might have been better to use the AOTC in 2018-2021. Of course, this is just a guess.

As dcandmc said, I did need the 8615 and TurboTax took care of that. This unearned income is taxed at my rate. It appears that his earned income is on the "bottom" and the unearned income is on the "top", meaning that his lower-rate earned income is buried under the standard deduction, and the higher-rate unearned income is what is actually taxed.

Overall, our net savings for using the AOTC was about $1800, which is a pretty nice break. But we could have received about $1700 of that with half the cash outlay, and might have been able to get the whole $2500 by waiting until a later year.

[kendricksmith]

I am getting ready to pay our first college bill and trying to coordinate scholarships, 529, AOTC, taxes, etc.

My son received some scholarships. I was told by the school that the scholarships are applied to the overall bill, and that I can decide how to apply the scholarships to the items in the bill.
My understanding is that scholarships are tax-free for tuition, fees and books. However, they are taxable for R&B.
Our expenses after scholarships this semester will be about $3500. I could consider this to be part of R&B to reduce the amount of taxes.
However, I want to get the AOTC, which cannot be used for R&B.
If I consider the $3500 out-of-pocket to be a part of tuition to claim AOTC, scholarships will cover all of R&B.

Does this mean that the full amount of R&B will be taxable income? To the student?

Thanks,Kendrcik Smith