How to classify repaying a scholarship?

[marsexpressscorpion]

I received a scholarship for my education, with the stipulation that I work for the employer that provided the scholarship, otherwise the scholarship would turn into a loan that would need to be repaid.

I received a job offer with another company that makes more financial sense to take and repay this scholarship. My problem is that these funds were reported in box 5 of my 1098-T over the course of three years, so it's my understanding that I paid income taxes on these funds, which should not be the case for a loan.

Now that those funds are being retroactively reclassified as a loan, how do I deal with my taxes? Do I have to refile for the years that I received the scholarships and reclassify those amounts as a loan? If so, how do I account for the discrepancy in what is now true and what was listed on my 1098-Ts (do I just... change box 5 to $0 or what)? If not, can I just deduct payments towards that loan off of this year's return?

I'm not quite sure where to start on this one, so any help would be greatly appreciated.

Thanks!

Edit: I should have also mentioned that the amount in box 5 was significantly greater than the amount of box 1 since the scholarship included a hefty stipend, which is why I'm concerned with the income taxes I paid.

[macuser_22]

I doubt that the school will reissue 1098-T forms if the money was given to them at the time as a scholarship.   The IRS goes by what the school reported.     Probably at the time it *was* a scholarship and was taxable as such.   I know of no provision in tax law that allows changing a scholarship retroactively.    If a loan, then it could not have been reported on a 1098-T in the first place.   You side deal with the employer to pay it back would seem to be separate from the original reporting of the scholarship and only between you and the employer.

[Hal_Al · Accepted solution]

It sounds like you have a "repayment" situation.

Repayments.   This situation is described in IRS Publication 525.  If the amount is more than $3000*, you can take a itemized deduction, on line 16  of schedule A (not subject to the old 2% of AGI rule) or  you can take a credit. The credit is computed by re-figuring the tax from the previous year as if the income had not been received. Then the difference in tax is claimed as a credit on the current year's return.  TT does not do the credit calculation or compare it to the alternate deduction. You have to do that manually. You enter the credit in the forms mode (the forms mode is not available in the on-line versions of TurboTax [TT]). All entries that seem like you should be able to enter on Form 1040 or Schedules 1 through 3 have to be entered on TurboTax's 1040 Worksheet. Scroll way down to Other Credits and Payments Smart Worksheet. Select item D, claim of right under IRC 1341 for repayments. It ends up on line 13 of schedule 3.

 So, the taxpayer  has the option of either claiming the credit or deducting the repayment as an other itemized deduction, whichever provides the greater benefit.  But, you cannot file an amended prior year return.

You can only deduct amounts that were included as taxable income on previous tax returns.  

* If the amount is $3,000 or less, no deduction or credit is allowed. In the past, a miscellaneous itemized deduction, subject to the 2% of AGI threshold, was allowed.  But, all miscellaneous itemized deduction, subject to the 2% of AGI rule went away in 2018.

[marsexpressscorpion]

Thanks for your reply! 

In this case, the employer is actually the United States Government, and the scholarship is issued directly through government funds (an NSF grant to my University), so it's all the more confusing.

The details of repayment are complicated, but the simple version is that I have 30 days to pay in full directly back to the University. After 30 days, it becomes a debt to the US Treasury with an interest rate set by the current interest rates of a Federal Direct Unsubsidized Stafford Loan.

Do you still think the repayment is separate from the original reporting, even though the entity I made the agreement with was the federal government? If you have any other insight I'd very much appreciate it! 

[marsexpressscorpion]

Hal_Al, thank you very much for your reply! This sounds like it definitely provides a good starting point for me to look into a bit further, and is exactly what I was looking for.

[Hal_Al]

I haven't seen your exact situation covered here in this forum.  It's usually an employer signing bonus or social security repayment.

That said, it still seems straight forward.  In the year(s) you make a repayment, you can claim a deduction or credit; whether it's paid back in a single year or spread out over several years. See rjs's comment: the establishment of the loan may be considered a lump sum repayment.

So, the fact that it's the government or the school doesn't matter.  What matters is whether you paid tax on the scholarship income.  Unless you had other income, at the time, chances are  that not all the scholarship was taxable; so you'll have some calculations to do. 

[marsexpressscorpion]

That would make sense. Thanks again for your help

[rjs]

@marsexpressscorpion 

As Hal_Al said, you almost certainly did not pay tax on the full amount of the scholarship in the years that you received it. You probably paid tax only on the amount that exceeded your tuition (box 5 minus box 1 on the 1098-T). You can't claim a credit or deduction for repaying money that you didn't pay tax on in the first place.

You can't just rely on the figures from the 1098-T. You have to look at your tax returns for the years that you received the scholarship and see how much was actually reported as taxable. Taxable scholarship income is included on the wages line of your Form 1040 - either line 7 or line 1, depending on the year. To the left of the amount on that line there should be the abbreviation SCH and the amount of taxable scholarship income.

Calculating the IRC 1341 credit for repayment of income that you received in more than one earlier year, and that you repay over more than one year, is going to get very complicated. You have to determine which year's taxable income you are repaying each year. I don't know what the rules are for doing that. And in any case you will have to recalculate your tax for more than one earlier year. If you get into this situation you should probably consult an accountant.

If you turn it into a loan, you should definitely consult a tax expert. It might be treated as having repaid the entire scholarship in the first year, and the loan is a separate personal loan. It's the same as if you took a loan from a bank in order to repay the scholarship. In any case, you cannot claim the interest as part of the repayment, only the actual amount of taxable scholarship income. And the loan would not qualify as a student loan (even though the interest is pegged to the Stafford loan rate), so there is no way to deduct the interest.