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21 year old stressed over taxes on scholarships. How do I proceed?

As I prepared for my 2018 taxes, I had some thoughts come into my mind and now I am very scared and worried. I live in Texas and attend a well known Division 1 college. In 2017 I did NOT work. I did not earn a single dime from employment. However... I received $13474.00 as a refund from a scholarship I received throughout the year. I have 2 classes I took that my refund did not cover. One class was $300 and the other was $1179. From my understanding, these could have been used as deductions. Anyways.. 2017 was the first year I received a refund. I was unaware that taxes must be paid on scholarships. On top of that, I never once received a letter from the IRS or anyone asking where my taxes were or anything. With that, I am stressing out now. I do not want to be 21 years old and end up owing some outrageous amount of money that I cannot afford. This was the only money I received the entire year of 2017. My question for the community is this... 

What do I do? How do I act? Please help because I am freaking out and stressed beyond belief.


Thank you.

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21 year old stressed over taxes on scholarships. How do I proceed?

Here is the simple situation.

1. You have taxable income in the amount that your scholarship is more than tuition plus required fees.  That seems to be $11,995, although maybe there are some fees you didn't account for.  What matters is the tuition you actually paid in 2017, even if it was extra classes that you didn't originally enroll in.

2. This income is considered "unearned income".  That's important later.

3. You need to file a 2017 tax return.  Assuming you are single with no dependent children, you would file as single and check the box for "someone else can claim me as a dependent.

4. You get a $6350 standard deduction, meaning $5645 is taxable.

5. The "kiddie tax" taxes your unearned income at the same rate as your parent, if they claim or could claim you as a dependent.  Normally, this means that parents can't put investments in their children' names to pay lower taxes.  But it also impacts you.

6. Based on your mother's income, that $5645 of taxable income might be taxed at 10%, 15%, or 25%.  It's not likely to be higher than that unless your mother earns more than around $150,000.  10% or 15% is probably more likely.

7. So that might be $565 or $846 of income tax.

8. The late fees and penalties are roughly 1% per month of the amount you are late, in this case, back dated to April 15, 2018, which was the deadline for filing the 2017 return.  So around $100 or less at this point.  Turbotax may offer to calculate the penalty.  Don't take the offer, since the calculation is almost always a few dollars off and the IRS inevitably sends a bill for the rest.  Just pay the tax you owe and let them bill you for the correct penalty.  If this is the first time you owed a penalty, you can request a waiver after you get the bill.  https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-first-time-penal...


Now, there is a more complicated solution.  If you were to report that you paid $2000 in tuition with your own cash, and received a $15K refund instead of a $13K refund, you would show more taxable income and show more income tax owed.  But, you would also qualify for the American Opportunity Tax Credit.  It won't result in a  refund, but it will zero out the tax you owe, meaning you owe no tax and no penalties.  Due to the way the credit works and the limitations because of your age and that you live with a parent, there is no point to claiming more than $2000 of tuition paid. 

This "trick" is completely legal.  However, to use this trick you still have to file a tax return and put it in writing.  If you never file, the IRS will probably get around sooner or later to matching up your form 1098-T in their computer and realize you never filed a return, and send a letter and tax bill.

There are a couple other experts who are probably better at explaining this trick than we are, including how to enter it in Turbotax.

Then for 2018, if you also got a refund in excess of tuition and qualified fees, you get to do the same thing all over again.

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37 Replies
Carl
Level 15

21 year old stressed over taxes on scholarships. How do I proceed?

Right now, lets talk about the 2017 taxes **ONLY** and nothing else. Deal with 2018 later. Because of your age, does the below apply to you? Forget about anything and everything else. I only want to know if the below applies and if your parent's qualified to claim you on their 2017 tax return, and that's it. Right now, nothing else matters to me.
First, who claims the student as a dependent?
If the student:
Is under the age of 24 on Dec 31 of the tax year and:
Is enrolled in an undergraduate program at an accredited institution and:
Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a full time student) and:
the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)
Then:
The parents qualify to claim the student as a dependent on the parent's tax return . Period, End of Story. But one thing I want to point out here. The parents *QUALIFY* to claim the student. The parents are *NOT* required to claim the student as a dependent. But even if they don’t, since they *qualify* to claim the student, then if the student will be filing their own tax return the student is *REQUIRED* to select the option for “I can be claimed on someone else’s return”.  To reiterate:
If the student qualifies to be claimed on the parent’s tax return, then the student can not take the self-exemption on their own tax return, no …matter…what.

21 year old stressed over taxes on scholarships. How do I proceed?

Carl,
Yes, I am under the age of 24. Yes, I am enrolled full time and I did NOT provide more than 50% of my support. The refund was used for support. With that in mind, I believe YES, I did qualify to be claimed. However.. neither of my parent's claimed me.

21 year old stressed over taxes on scholarships. How do I proceed?

Did you pay part of your tuition with cash or loans?  A scholarship is only taxable if it is more than your qualified expenses for tuition and required supplies.  

21 year old stressed over taxes on scholarships. How do I proceed?

The money I stated was received as a refund. In other words, my scholarship paid my tuition then I received the balance as a refund check. However.. at the last minute I signed up for 2 additional classes in which one was $300 and one was $1179. Yes, I used the 13k to pay for those two classes, but they were not covered initially. Had they been covered initially, my refund would only be $11,995.
Carl
Level 15

21 year old stressed over taxes on scholarships. How do I proceed?

Opus, " I did NOT work." and "2017 was the first year I received a refund" pretty much indicates the "refund" was from the college for excess scholarship money not used by the school for qualified education expenses, or a refund from a 2016 tax return. So there's no way that borrowed money (even if there are student loans) was used to pay for qualified education expenses *at this point in the conversation*. I have a bit to go here to keep things straight so that nobody (especially @bridan121895 ) gets confused.

Thanks @bridan121895 . Just be aware that weather your parents actually claimed you as their dependent in 2017 doesn't matter. It only matters if they *qualified* to claim you, and they did qualify. So that tells me that you did not take the self-exemption on your 2017 tax return. Furthermore, the only way you could have received a refund "in 2017" would be if you worked in 2016, filed a tax return for that in 2017 and got a refund. So please clarify this. Was this a return of excess scholarship money paid to you in 2017 that was not used by the college to pay qualified education expenses? Or are you referring to a federal refund from your 2016 tax return, that you would "in fact" have received in 2017?

21 year old stressed over taxes on scholarships. How do I proceed?

This was a return of excess scholarship money. Read my reply to Opus, I went a little more in detailed. Basically, the refund was given to me but then I decided to register for 2 additional classes. Those classes were paid for with the refund money. If I would've signed up earlier though, my refund would have covered these classes and then been reduced to the amount of $11995.
Carl
Level 15

21 year old stressed over taxes on scholarships. How do I proceed?

Okay, you "may" need to amend your 2017 tax return, and if so it may actually be to your benefit. But I'm not to that point yet. There also may not be any need for you to amend at all, too. You may be fine.
Understand that there is a difference between reportable income, and taxable income. Just because income may be reportable to the IRS, does not mean it's taxable. Now for the next question. But do pardon my slowness here, as I'm trying to be thorough. I know you're stressed and a bit upset right now. So I'm in hopes you can get to sleep tonight with a sigh of relief.
Okay, reportable income includes earned income reported to you on a W-2, self-employment income received from a business you own or a business you have an ownership interest in, as well as any unused scholarship money returned to you in 2017 (key words, "returned in 2017".)  and a few other things that I'm assuming do't' apply to you. (i.e., interest income reported to you on a 1099-DIV for example)
So for 2017, did the total of all your reportable income exceed $6,350?

21 year old stressed over taxes on scholarships. How do I proceed?

Of course, because the scholarship exceeded qualified expenses by around $5000.

And I don't think the credits here are at issue.  The taxpayer did not pay any qualified expenses, so neither the parents nor the student qualify for anything.  And scholarship in excess of qualified expenses is taxable income.

About $5000 of taxable income, so $500 owed in taxes, plus late fees and interest.

Your qualified expenses are tuition and required fees (for example, student activity fees or an extra fee for a lab course or field work).  The student health fee is not qualified, even though paid to the school, since it provides for medical care not education.  Books don't qualify for this particular purpose.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/credits-deductions/individuals/qualified-ed-expenses">https://www.irs.gov/credit...>

If you filed a 2017 tax return, you would have been asked about education expenses and form 1098-T.  You should have received this form from your school reporting the actual tuition you paid and the scholarship you received.  Maybe your parents got the 1098-T, but you need a copy.  As you answer the interview questions in the education expense interview, you are asked about tuition and other qualified expenses, the scholarship and so on.  If the scholarship (free money) is more than tuition and qualified expenses, the difference is taxable.

If you had no other taxable income and did not file a tax return, then when you do file one, your tax on the scholarship will be about $500.  You can be claimed as a dependent so you check that box in the personal interview, even if your parents didn't actually claim you.  

Or if you did file a return, but didn't include the scholarship refund you need to file an amended return.

If you filed and did not check the box for "I can be claimed as a dependent" then your tax owed would be much less.  It's technically wrong, but you are unlikely to get caught.
Carl
Level 15

21 year old stressed over taxes on scholarships. How do I proceed?

Okay, I'm done. I'm not here to do a tit-for-tat. You take it Opus.

21 year old stressed over taxes on scholarships. How do I proceed?

Prior to 2017, how many years have you been in college?

Are you sure your parents did not claim you as a dependent?  If so, do you know why they did not claim you as a dependent?

@Opus 17  Where did you get $5000?  The excess scholarships is $11,995.  Then minus the $6350 Standard Deduction, you get $5645 of "taxable income".

Once @bridan121895   answers my questions, we can get to work on how much tax there is.

21 year old stressed over taxes on scholarships. How do I proceed?

"About" $5000.  

21 year old stressed over taxes on scholarships. How do I proceed?

Opus, I think you originally meant "because the scholarship exceeded *THE STANDARD DEDUCTION* by around $5000", rather than "qualified expenses" (tuition).  I missed that you just phrased it awkwardly, but now see you meant the "Standard Deduction".

21 year old stressed over taxes on scholarships. How do I proceed?

I am class of 2019. So in 2017, I had been in college for 1 and a half years since technically I began in August of 2015. My parents did not claim me as a dependent, 100%. To be quite frank with you, my father and I do not have a relationship and my mother is struggling to get back on her feet. Question for Carl and everyone, why am I eligible for a $6350 deduction. Where is that coming from? Do I need to check the box stating that "I can be claimed as a dependent" to receive that deduction? If not, what is the benefit of me checking it?

21 year old stressed over taxes on scholarships. How do I proceed?

Another question for everyone, we are talking about late fees and penalties, how much am I potentially looking at total? $1000s?
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