How do I handle grant money awarded to daughter

[jb4moore31]

My daughter is a junior at college. We paid tuition and partial room and board out of her 529. The remaining room and board we paid out of pocket. She received a $6,000 grant for a research assistantship that she was awarded. The money is for a two-year research project she is doing under the guidance of her college advisor. No restrictions have been placed on the funds. She used a portion to buy a computer for the research work and has not used any other funds. The grant was paid through her college so it shows up on the 1098-T. After entering information from the 1099-Q and 1098-T, plus entering the expenses for room and board and her computer, Turbo Tax is showing a little of $2,000 that she has to claim as income on her tax return. Her earnings for the year totaled $150.00. Is this all correct? Does she have to claim a portion of the grant on her return?

[DianeW777]

It depends.  The following shows examples of taxable and tax-free grants or scholarships. Since the amount is shown on the Form 1098-T and she is a research assistant then there can be taxable income and is included with other taxable income.

Tax-Free

If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:

• You're a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
• The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.

Taxable

You must include in gross income:

• Amounts used for incidental expenses, such as room and board, travel, and optional equipment.
• Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. 
  • You don't need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college.
• IRS Tax Topic 421
• Entering Form 1098-T 

[Hal_Al]

Q. Is this all correct? Does she have to claim a portion of the grant on her return?

A. Simple answer: Yes.  With multiple tax issues involved (tuition credit, scholarship, 529 distribution) it is not unusual for the student to have some taxable income emerge. Taxable scholarship (as opposed to some of the 529 distribution being taxable) is usually the best alimentative.

TurboTax is capable of handling this complex calculation. But, it does require careful attention in entering the data.

If her total income is only $2150 (2000 + 150), she does need to file, as that is under the filing threshold (generally $12,400).

You do not mention whether you are claiming the tuition credit.  You should be

[jb4moore31]

Thank you. We are above the income threshold for education credit, so that isn't an option.