My oldest attends college out of state. His grants and scholarships covered his tuition, dorm, and meal plan except for about $300 each semester that he paid out of pocket.
After finishing his taxes, it looks like he owes money. They are considering the amount of scholarships that went to his dorm as income because it is not a "qualified educational expense." This university does not require its students to live on campus in a dorm, which is probably the reason.
If it is not an educational expense, could he claim it as rent paid? and if he does that, would he file it under our home state, or the state where he attends school? Is there another option I'm not considering?
Thanks in advance!
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No, there is no tax deduction for the cost of housing for a student. Just like you can't deduct rent if you rent an apartment and work for a living, there is no deduction for student housing. It is considered a personal expense.
The only time it may give you a tax benefit is if you took money out of a qualifying education savings account (529 plan) and used it for room and board. In that case it would be considered a qualifying education expense so you wouldn't have to pay tax on the distribution you took.
Q. If it is not an educational expense, could he claim it as rent paid? and if he does that, would he file it under our home state, or the state where he attends school?
A. No, or almost certainly no. Most state rent credits are for you primary home. A student, away at school, primary home is his parent's home and/or the place he was living before going away to school. School housing, on or off campus, is only temporary. Otherwise, you'll have to check the rules for your state(s).
Q. Is there another option I'm not considering?
A. Maybe. Books and other course materials, including a required computer are qualified expenses. You could "allocate" some of the scholarship money to those expenses. It is not necessary that you actually use that money for books, it's only necessary that you incurred qualified expenses.
Q. This university does not require its students to live on campus in a dorm, which is probably the reason it's taxable?
A. No. Housing and food are not qualified expenses not matter where or why. As the other reply said, room and board are qualified expenses for a 529/ESA distribution, but even then the scholarship would still be taxable (it's only the 529 money that would be tax free).
Depending on the amount of taxable scholarship and the source of his other income, he should get the full $13,850 standard deduction. For most students, this means that the first $13,850 of their "taxable" scholarship still goes un-taxed.
Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400). It is not earned income for the kiddie tax and other purposes (e.g. EIC). For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.
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