Is room and board covered by the California Middle Class Scholarship?

[Human Learning]

• Does the California Middle Class Scholarship allow you to cover room and board expenses tax-free?
• If that's not the case, can I report the additional California Middle Class Scholarship money that exceeds my qualified educational expenses as taxable income? I want to know if I can use it for things other than room and board since I already have 529 funds covering those costs.
• Thanks a lot. 

[LeticiaF1]

Generally, scholarships aren't taxable if used to pay tuition and school-related expenses. ‌However, sometimes they may be taxable if you have excess money that is used to cover room or board, utilities, and other non-qualified expenses.  

You can use a 529 plan to pay for qualified room and board expenses like rent, and other housing costs.

Are my scholarships, fellowships, or grants taxable?

Taxes for Grads: Do Scholarships Count as Taxable Income?

Middle Class Scholarship

[Hal_Al]

Q. Does the California Middle Class Scholarship allow you to cover room and board expenses tax-free?

A. No.  No scholarship  is tax free if allocated to room & board (R&B). 

Q. Can I report the additional California Middle Class Scholarship money that exceeds my qualified educational expenses (QEE) as taxable income?

A. Yes. You can and must report scholarships as taxable income if they were not covered by  QEE.  That is usually the best strategy, bur there is a limit depending on the student's other income. 

 Your post asks about R&B and scholarships and 529 funds but not the tuition credit?

[Human Learning]

For example:

The 1098-T form shows an $8,000 middle-class scholarship recorded in box 5 and $5,000 in box 1. From this scholarship, $7,000 will be reported as taxable income, while $4,000 is allocated for out-of-pocket tuition expenses to qualify for the American Opportunity Tax Credit (AOTC).  This leaves $3000 available for other expenses. But since I’ve already pulled 529 funds to cover all living costs, including room and board, that extra $3000 is just sitting there.

Is it permissible to keep the $3,000 purely as taxable income without actually spending it, and if so, could this decision result in any tax penalties?

I appreciate any answer you can provide on this.

[Hal_Al]

Q. Is it permissible to keep the $3,000 purely as taxable income without actually spending it? 

A. Yes. It's that simple.

Q. If so, could this decision result in any tax penalties?

A. Theoretically, yes.   If it resulted in high tax and you did not have sufficient withholding done, there could be an underpayment penalty. But that's unlikely, given the income situation of most students and the high standard deduction for earned income. 

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450 but not more than $14,600).  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.