Working on College Freshmans Tax Return

[runwad]

My dd18 is a college freshman. She worked last summer for the 1st time, so doing a federal return for her. She had $147 in Federal taxes withdrawn from her pay. I thought she'd get all this back BUT, on the 1098T from her college her scholarship is $500 less than her tuition. Sidenote, tuition is also listed $300 less than what we were actually billed & paid, are there some items that don't qualify as an expense?

So going thru turbo tax, it asks was any of your scholarship used for room and board. Yes actually 1/2 of it was grants for room and board. So when I put the amount in towards room and board, her refund went from $147 to $75, is that right? And can you explain to me why? Are these grants considered income now to her?

Thanks for helping me understand.

 

[Anthony1971]

Research IRS publication 970 (year 2016)
it seems Scholarships for room and board can be taxable income in some very specific cases as in a grant or scholarship that is and says it is for room and board. Read over what it says maybe you answered a question wrong.

 

[runwad]

It looks like from https://www.irs.gov/pub/irs-pdf/p970.pdf that room & board is not a qualified expense and is taxable in the form of a scholarship or grant:
Eligible educational institution. An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
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.
Expenses that don't qualify. Qualified education expenses don't include the cost of: Room and board, Travel, Research, Clerical help, or

also from the link:
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


There is nothing on the 1098 that specifies half of the scholarship amount was for room & board. But my thinking is if I say it's tax free, then it looks like we got scholarships to pay all her tuition except $500. That would take us out of qualifying for the full value of the American Opportunity Credit of $2500.

I'm hoping some others can weigh in on this to let me know if my assumptions are correct. This is the first I'm dealing with scholarships and taxes.

 

[tvguy]

First thing I would do if she is still working is file for a Student Exemption from withholding. Don't know what she made, but if they only withheld $147 in federal taxes, it probably wasn't enough for her to even have to file income taxes other than get a refund. That is what my CPA had both my kids do (and me too 30 years ago when I was in college).

EDIT: Sorry, flunked math. 40 years ago when I was in college.

 

[Claire&TheBoys]

I work for a CPA and usually if a student is still a dependent of the parents, the parents put the 1098-T on their tax return, not the student's.

 

[4shinystars]

We've always had to use the 1098-T on our returns, not our child's.

 

[bjscheel]

I work for a CPA and usually if a student is still a dependent of the parents, the parents put the 1098-T on their tax return, not the student's.

Yes, normally a 1098-T should go on your own return and just have her return be her W-2. Otherwise you definitely won't get the tax credit you mentioned above. On page 19 of the pub you linked to, it says that the college can put on the 1098-T either the amount paid, or the amount billed, which may be different from what you paid. When figuring the credit, you are to use the amount you actually paid for qualified expenses. So if you know what you paid for tuition, use that amount that you paid.

But as far as the scholarship for room and board, I haven't encountered that before. Here is an IRS Tax Topic, if it helps:
https://www.irs.gov/taxtopics/tc421.html
And here is an interactive interview:
https://www.irs.gov/uac/do-i-includ...or-education-grant-as-income-on-my-tax-return

If it is taxable, I don't know if it would go on her return or yours...

 

[Anthony1971]

I would think your best bet is to call Turbo tax and ask they claim to have good support???? never dealt with them.... while it may not be the biggest help as most people there do not have experience they may be able to guide you in the right direction... Otherwise you may want to pay a CPA not one of the overnight places to do your taxes but in the end the amount you are talking about does not warrant the cost... but the headaches might....

 

[runwad]

Yes, normally a 1098-T should go on your own return and just have her return be her W-2. Otherwise you definitely won't get the tax credit you mentioned above. On page 19 of the pub you linked to, it says that the college can put on the 1098-T either the amount paid, or the amount billed, which may be different from what you paid. When figuring the credit, you are to use the amount you actually paid for qualified expenses. So if you know what you paid for tuition, use that amount that you paid.

But as far as the scholarship for room and board, I haven't encountered that before. Here is an IRS Tax Topic, if it helps:
https://www.irs.gov/taxtopics/tc421.html
And here is an interactive interview:
https://www.irs.gov/uac/do-i-includ...or-education-grant-as-income-on-my-tax-return

If it is taxable, I don't know if it would go on her return or yours...

When you do turbo tax it asks the student if they got the 1098, and then it usually says you can't get a credit because someone else claims you. That's how it is on my other DD's who doesn't have room & Board $$. The wrench this time is with the room & board money. Even reading the topic you listed, it does say room and board is taxable. And it's taxable to the student not the parent. We would want it taxed at her level not ours. Anywho I have a friend who's a CPA so I'll run this by her. Just thought maybe someone here might of dealt with this. I thought I'd read about it before.

 

[ceecee]

Wouldn't it be better for you to get the deduction on your taxes by putting her as a dependent? If she does her own, you can't get the deduction for her.

 

[Sadie22]

Did she pay for her own tuition and room and board? When I was doing such returns, only the payer could take any credits or deductions for education expenses. Scholarship or merit award amounts over and above tuition and required fees (and there are specifications for these) are taxable to the recipient. You may need to read the actual IRS tax publications to understand this.

 

[C-CMom]

That would take us out of qualifying for the full value of the American Opportunity Credit of $2500.

This is an important point as are your definitons above.

(I am not a tax professional, but am an "enthusiast". Please consult with your own qualified advisor or check out everything yourself!)

Basically there are more expenses for college than tuition and books, so it is allowed (continue to check the IRS Pub 970 rules for specifics) to consider that your money went to Qualifying Expenses for American Opportunity Tax Credit (AOTC) while Scholarship/Grant money went to some of those "other" expenses, including the fairly pricey Room and Board category. My understanding is that the 1098-T does not necessarily have to have this delineated and that often the numbers won't exactly match what you enter on your tax forms, though you would keep records of how you calculated it. You would need to be able to show you paid your own actual money for the Qualifying Expenses, I would think.

If the scholarship funds were not required by terms of the scholarship to go for specific expenses, it may be appropriate (if otherwise fits your situation, including for any state income tax that may apply), to claim (some?) as income for the Child and to have the Child pay appropriate federal income taxes based on the Child rate. This would potentially change the amount of personal dollars you spent as the parent for Qualifying Expenses, so that you would be eligible for some or all of the AOTC on your own return. Deep within the Pub 970 information from IRS is information on why and how to do this or you could ask a knowledgeable tax professional.

Depending on a number of variables, this may be worth calculating "the long way" not just how TurboTax walks you through it. It is helpful to know how various things work early in the college years, so you can plan to pay select expenses from the most appropriate sources in future years if you are fortunate enough to have options. For example, since any money paid from a 529 College Savings Plan can't be used to calculate the amount you spent for the AOTC, it is helpful to decide in advance how much to use from such a source before withdrawing the money as this could also block eligibility from some or all of the AOTC.

It's complicated.

(I am not a tax professional. Please consult with your own qualified advisor or check out everything yourself!)

Good luck!

 

[runwad]

^ Yep it is complicated, and I never came back to say how I did it. I believe in IRS 970 it says you can add some of the scholarship to your students taxable income on their return. My DD only grossed 3k so I added another 3k from her scholarship to her income. She was still below the standard deduction $6300 so no additional tax was owed by her.

I then got to claim the 3k in tuition and 1k she spent in books in order to get the full $2500 of the AOTC. I was glad to find that stipulation in the code to add some of the $ to her income. Of course I made another blunder this year and paid the rest of her tuition out of her 529, so my only option was being able to add some of the scholarship to her income. I'll be sure not to make that same mistake twice.

 

[happily single]

I work for a CPA and usually if a student is still a dependent of the parents, the parents put the 1098-T on their tax return, not the student's.

Even if the 1098-T is in the student's name?

 

[Sadie22]

A 1098-T will always be in the student's name.

 

[runwad]

Even if the 1098-T is in the student's name?

If you go thru the irs.gov site and do a free file for your child with Turbo Tax, it will ask do you have a 1098 and then you input all the info and it will say, you are not eligible to get an education credit because someone else can claim you. So in actuality no it's not on the child's return, it's just one of the questions you answer. But in my one dd case it is listed on her return so that she could add some of her scholarship to her income. So it DEPENDS on your circumstance.

 

[Woth2982]

When I was a senior in college I got a grant. We did not realize it was taxable until I got the tax form in the mail. I ended up owing $350 that year in taxes.

 

[gottalovepluto]

When I was a senior in college I got a grant. We did not realize it was taxable until I got the tax form in the mail. I ended up owing $350 that year in taxes.

Ditto! What a nasty surprise that was! There was so many other things to balance during that time, including financially to pay those exorbitant college bills, the idea that my grant would be taxable didn't even occur to us either until the docs came in at tax time!

 

[lost*in*cyberspace]

You would be helping your daughter more by having her do her own taxes, especially now when they are so simple, rather than doing it for her. At least she should be with you while you explain how to do it.

 

[runwad]

You would be helping your daughter more by having her do her own taxes, especially now when they are so simple, rather than doing it for her. At least she should be with you while you explain how to do it.

Absolutely but she is away at school and won't be back for a while. My older dd21 does her taxes with me sitting with her. Believe me you are preaching to the choir, I wholeheartedly agree.