Scholarship for tution

[Hal_Al]

Scholarships used for Qualified Educational Expenses (QEE)(tuition, fees, books and other course materials, including a required computer) are tax free and are not reported on your tax return.  Scholarship money used for non QEE (room & board) are taxable.  When  scholarship amounts  exceed QEE, the excess is considered taxable income. When box 5 of your 1098-T exceeds Box 1, TurboTax (TT) will treat the difference as taxable, unless you enter other qualified expenses (books & computers). 

There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.

[zeeph]

Thanks,

My full question did not post - reposting. My daughter gets scholarship for tuition & living expenses -1098T shows exact tuition amount. After tuition, books/computer expenses and standard deduction the remaining is her taxable income. This income is taxed at parent's tax rate, generally higher than what the actual income tax bracket is, due to "kiddie-tax". However, I thought that of the first $2200 of this taxable income subject to "kiddie-tax"- $1100 was not taxed, remaining $1100 was taxed at 10% and the amount greater than $2200 was taxed at the parent tax rate. However, TurboTax calculates the tax on the full taxable income at the parent's tax bracket rate which can be a fairly significant difference. Is this correct?

[MayaD]

The changes in the Kiddie Tax switched the taxes on unearned income over $2,100 from the parent’s tax rate to the tax rate for estates and trusts.

Less than $2,550      10%

$2,550 to $9,150        24%

$9,150 to $12,500      35%

$12,500 or more        37%

[Hal_Al]

@MayaD  The estate/trust tax rates was quickly repealed back in 2019.  For 2020 and beyond, the kiddie tax returns to pre-TCJA rules wherein a child's unearned income is taxed at the parent's marginal tax rate. For 2018 and 2019, a child could choose between TCJA rules and pre-TCJA rules for computing the kiddie tax.  https://www.nolo.com/legal-encyclopedia/kiddie-tax-limits-shifting-unearned-30003.html

@zeeph  You are correct, the first  $1100* is not taxed, remaining $1100 is taxed at 10%. After that the parent's rate is applied. The calculation is complicated.  Look closely at form 8815 (or 8814) to see what's happening.

*Actually it's not always $1100.  The amount covered by the student's standard deduction is not taxed.  A student's  standard deduction is $1100 or his earned income +$350 (but not more than $12,550). Scholarship income is earned income for purposes of the standard deduction, but unearned income for the kiddie tax tax-rate application. 

[zeeph]

Thanks @MayaD and @Hal_Al ,

@MayaD  the kiddie tax switched back to parents tax rate from 2020 onwards. 

@Hal_Al  and @MayaD - My question was whether the "kiddie-tax" deduction of $2200 also applies in addition to the $12,550 standard deduction or not? If so, the parents tax rate should not be charged on ALL income above $12,550 which is what TurboTax is doing. Should it be staggered? First $1100 at 0, next $1100 at 10 and anything above that at parent rate?, i,e, AFTER standard deduction ($12,550)? Thanks

[Hal_Al]

Q. My question was whether the "kiddie-tax" deduction of $2200 also applies in addition to the $12,550 standard deduction or not? 

A. Simple answer: No. The actual answer is: it doesn't work that way, (taxes aren't simple).  TurboTax (TT) is doing it right because the calculations are done on the actual IRS form 8615.  To verify that "TT is doing it right" follow the form. 

[zeeph]

Thanks @Hal_Al ,

Yes, following form 8615 it is either $12550 OR $2200 deduction although I am not sure how anybody would choose the $2200 deduction since $12550 would always be higher.

The issue is that the IRS treats scholarship as "unearned income" although the kid has put a lot more effort into obtaining that scholarship than would be required for other general "unearned income" categories. Unfortunately, this is thus taxed at parent's tax bracket through no fault of their own. Oh Well !!

[offertree]

Can someone tell me does the scholarship covers book costs? It's so expensive to buy all of them. That's why my daughter uses this source https://paperap.com/free-papers/maya-angelou/  with book analysis for some coursework. It saves our budget a lot but I want to allow her all things she needs for education...

[NCperson]

@offertree - are you asking about a specific scholarship? no one here would know.  check the terms of the scholarship.

if you asking about the tax credits, then 

1) if you are taking the AOTC tax credit, then as long as the books are required for the class, then it's a Qualified Educational Expense.  It doesn't matter where you purchase the books. 

2) if you are taking the LLC tax credit, as long as the books are purchased directly from the school and required for the class, then it's a Qualified Educational Expense. 

[SweetieJean]

"Book Analysis" is an online data base that summarizes books.  Would that still count ?

[NCperson]

@SweetieJean it would not qualify for LLC....for AOTC, I could see the argument in lieu of buying the books as long as it is needed for a course of study... 

https://www.irs.gov/credits-deductions/individuals/education-credits-questions-and-answers

Q6. What additional education expenses qualify for the AOTC, but not the LLC?

A6. For the AOTC but not the LLC, qualified tuition and related expenses include amounts paid for books, supplies and equipment needed for a course of study. You do not have to buy the materials from the eligible educational institution. Add amounts paid for these materials to Form 8863 to your other adjusted qualified education expenses. The total of all qualified tuition and related expenses for calculating the AOTC cannot exceed $4,000 and as explained in Q&A 3, the maximum allowable credit is $2,500. See Qualified Education Expense for more information.

[Hal_Al]

Q. Can someone tell me does the scholarship covers book costs?

A. Simple answer: yes.

As the other replies indicate, a definitive answer depends on the terms of the scholarship.  It would be unusual for a student not to be able to use scholatships for books and other "course materials," inckuding "book analysis".  As for tax rules, Scholrships money  is tax free to the student if used for "Qualified educational espenses".

Per IRS Publication 970, For purposes of tax-free scholarships and fellowship grants,  Qualified education expenses. are expenses for:

• Tuition and fees required to enroll at or attend an eligible educational institution; and
• Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses
at the eligible educational institution. These items must be required of all students in your course of instruction. 

Although "book analysis"may not be "required of all students", a text book usually is.  I'm of the opinion that  "book analysis" is an acceptable sustitute.