College Education Expenses
Colleges work in academic years, while the IRS works in
calendar years. So the reality is, it takes you 5 calendar years to get that 4
year degree. With that said:
- Scholarships and grants are claimed/reported as
taxable income (initially) in the year they are received. It does not matter
what year that scholarship or grant is *for*
- Tuition and other qualified education expenses are
reported/claimed in the tax year they are paid. It does not matter what year
they pay *for*.
Understand that figuring out who claims the student as a
dependent, and determining who claims the education expenses & credits, is
two different determinations. It depends on the specific situation as outlined
below. After you read it, I have also attached a chart at the bottom. You can
click on the chart to enlarge it so you can read it. If it’s still to hard to
read on your screen then right-click on the enlarged image and elect to save it
to your computer. Then you can double-click the saved image file on your
computer to open it, and it will be even easier to read.
Here’s the general rules gisted from IRS Publication 970
at http://www.irs.gov/pub/irs-pdf/p970.pdf
Some words are in bold, italicized, or capitalized just for emphasis. This is
because correct interpretation by the reader is everything. Take the below
contents LITERALLY, and do not try to “read between the lines”. If you do,
you’ll interpret it incorrectly and risk reporting things wrong on your taxes.
For example, there is a vast difference between “can be claimed” and “must be
claimed”. The first one indicates a
choice. The second one provides no choice.
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 half 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 will claim the student as a dependent on the
parent's tax return and:
The parents will claim all schollarships, grants, tuition
payments, and the student's 1098-T on the parent's tax return and:
The parents will claim all educational tax credits that
qualify.
If the student will be filing a tax return and:
The parents qualify to claim the student as a dependent,
then:
The student must select the option for "I can be
claimed on someone else's return", on the student's tax return. The
student must select this option ieven f the parent's qualify to claim the
student as a dependent, and the parents do not claim them.
Now here’s some additional information that may or may
not affect who files the 1098-T. If the amount of scholarships/grants exceeds
the amount of qualified education expenses, the parent will know this when
reporting the education on their tax return, because the parent will not
qualify for any of the tax credits. (They only qualify for tax credits based on
out-of-pocket qualified expenses not covered by scholarships/grants.) Also, the parent’s will not qualify for the
credits depending on their MAGI which is different for each credit, and depends
on the marital status of the parent or parents.
In the case where scholarships/grants covers “all”
qualified education expenses, the parent’s don’t need to report educational
information on their dependent student at all – but they still claim the
student as a dependent if they “qualify” to claim the student.
If the
scholarships/grants exceed the qualified education expenses, then the student
will report the 1098-T and all other educational expenses and
scholarships/grants on the student’s tax return. The student will pay taxes on the amount of
scholarships/grants that are not used for qualified education expenses. However,
if the student’s earned income reported on a W-2, when added to the excess
scholarships/grants does NOT exceed $6200, then the student doesn’t even need
to file a tax return, and nothing has to be reported.
If the student has any other taxable income not reported
on a W-2, and it exceeds $400, (not including taxable portion of
scholarships/grants) then most likely it’s considered self-employment income.
That will require a tax return to be filed and the student will have to pay the
Self-Employment tax on that income.
Finally, regardless of the student’s W-2 earnings, if any
taxes were withheld on those earnings and it was less than $6200, then the
student should file a tax return so as to get those withheld taxes refunded.
