Q. Tuition is $23348, so grants - tuition =$6972, this will be his taxable income, right?
A. Yes.
Q . I want to do 529 withdraw now. Is my 529 qualified expense $14160 (meal/board) or $14160 - $6972 (grants -tuition)=$7188?
A. $14,160.
Room & board (R&B) are not qualified expenses for tax free scholarship. So, all the R&B can be allocated to the 529 distribution. Don't forget books and a computer as additional qualified expenses for the 529 distribution. Books/computers are also qualified expenses for tax free scholarship; but, in your case, are best allocated to the 529 distribution.
Q. My son's grants are more than tuition, the excess of grants over tuition is taxable, do I have to reduce qualified 529 withdraw by this excess?
A. No, since the excess scholarship did not pay for any qualified expenses.
Q. The taxable grants is treated as earned income by dependent's filing requirement in 1040 Instruction, right ?
A. Yes*
Q. So, my son's taxable earned income will be $6972 (grants -tuition)+$4000 (AOTC )+$4000 (work study) =$14972, his unearned income is $200; $15, 172 total reportable income. Is he required to file a tax return for 2025?
A. No, because his total income is less than the $15,750 filing requirement for 2025 (technically HIS filing requirement is 14972 + 450 = $15,422 [earned income + $450] rather than $15750).
But, you may want to have him file, anyway, to document the reporting of the additional $4000 of taxable scholarship that allows you the claim the AOTC
*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $15,750 filing requirement (2025) and the dependent standard deduction calculation (earned income + $450). It is not earned income for the kiddie tax and other purposes (e.g. EIC). For grad students and post grad fellows (but, not undergrads), scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.
