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obritagain
Level 1

Scholarship Taxes

Hello, first-time tax filer here!

 

I'm a junior in college who pays for school through working and grants directly from my school and FAFSA. For the past 3 years, the grants covered all of my tuition, with some excess that partially paid my on-campus housing and meal plans. I worked to pay the remaining bill off. The thing is, I've never filed a tax return as I only considered my earned income from working (which at 4k is far less than the amount required to file). I've received 1098-Ts for the past 3 years, and for every year my scholarship/grants exceeded my qualified expenses by 10k or more. But I never personally received this money, it went straight to my bill, so I didn't think anything of it.

 

2020 was the first year I ever got a refund from this, since my school is keeping us off-campus due to COVID (so no money went directly to my meal plan/housing this time), so I was going to file. Now I'm a bit freaked out. Was I supposed to report that income for the past 2 years?! My parents don't know anything about this as I'm a first-generation student, and I definitely don't have the money to pay off taxes for 20+ thousand dollars. What are the next steps I should take? Thank you ahead of time! 

1 Best answer

Accepted Solutions
Hal_Al
Level 15

Scholarship Taxes

"FAFSA" may include loans as well as grants.  Ignore loans. That's your money to do with, as you please.

 

There is  a requirement to report taxable scholarship on the student's return. Taxable scholarship, including Pell grants, is the amount of the scholarship that exceeds qualified educational expenses (QEE). Tuition, fees, books and computers are qualified expenses. 

 

"But I never personally received this money" doesn't make it non taxable.  You effectively received it.

 

If the taxable portion of your scholarship plus your W-2 wages was less than $12,400 (a little less in 2018 & 2019), you were not required to file a tax return.  So, 10K + 4K, means you, most likely, shoulda filed, although the amount of tax would have been small (about $150-$200). 

 

Your parents should have (most likely) been claiming you as a dependent in the past (because your support came from FAFSA, not your own funds).  You (and they) most likely need to be filing amended returns for past years.  See below for how this could be a good thing. 

_________________________________________________________________________________________

 

 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.

View solution in original post

1 Reply
Hal_Al
Level 15

Scholarship Taxes

"FAFSA" may include loans as well as grants.  Ignore loans. That's your money to do with, as you please.

 

There is  a requirement to report taxable scholarship on the student's return. Taxable scholarship, including Pell grants, is the amount of the scholarship that exceeds qualified educational expenses (QEE). Tuition, fees, books and computers are qualified expenses. 

 

"But I never personally received this money" doesn't make it non taxable.  You effectively received it.

 

If the taxable portion of your scholarship plus your W-2 wages was less than $12,400 (a little less in 2018 & 2019), you were not required to file a tax return.  So, 10K + 4K, means you, most likely, shoulda filed, although the amount of tax would have been small (about $150-$200). 

 

Your parents should have (most likely) been claiming you as a dependent in the past (because your support came from FAFSA, not your own funds).  You (and they) most likely need to be filing amended returns for past years.  See below for how this could be a good thing. 

_________________________________________________________________________________________

 

 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.

View solution in original post

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