taxes with student aid

[macnchz]

hi so i’m a second year college student. my 1098-t is saying 15k for line 1 and 27k for line 5. i know that the $12k in the middle is taxable, but how much will this be taxed? in total for 2024 i made $15,500 including part time jobs, and this excess refund. will i have to pay on the full 12k? or a portion? and how much percentage? i’m just terrified im going to have to pay thousands in taxes when i use the money for housing. my mom is claiming me on her taxes as well if this makes any difference. 

[Hal_Al]

Q. Will I have to pay tax on the full 12k? 

A. Yes, because your other income ($15,500) exceeds your standard deduction ($14,600 for 2024). This means that any additional income is fully  taxed, at your marginal rate.

Q.  At how much percentage? 

A.  Most at 10%.  Some will be 12% (or 22%, see next question). 

Q. My mom can claim me on her taxes as well if this makes any difference?

A.  Yes.  Taxable scholarship is considered unearned income* and subjects you to the "Kiddie tax", wherein part of your income is taxed at your parent's marginal tax rate (probably 22%), rather than your marginal rate (12%). 

Housing is not an eligible expense, for scholarship money to be tax free, but books and other course materials (including a computer) are. So, the difference between box 1 and box 5, on the 1098-T is not necessarily the taxable amount. 

There is another other issues.  Is your mom eligible to claim the tuition tax credit (is her income not too high, usually $90K, $180K married filing jointly).  See separate discussions, below. 

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement ($14,600 for 2024) and the dependent standard deduction calculation (earned income + $400 ($450 for 2024)).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

[Hal_Al]

 There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. 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.

[Hal_Al]

While technically there is a provision that allows a student-dependent to claim a federal tuition credit, from a practical matter it seldom works out.  A full time student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable).

[macnchz]

i mean the $15.5k is in total of what i made including the financial aid. so i made approximately 3k from working. does that mean i will have to pay tax on about 1k? also my mom is in the 12% bracket 

[Hal_Al]

Q. i mean the $15.5k is in total of what i made including the financial aid. so i made approximately 3k from working.  Will i have to pay taxes on the full 15.5k or just the 15,500-14,600 (900)

A. Just the $900, at 10%. 

Q.  Also my mom is in the 12% bracket?

A. Then you want to use the "loop hole", so that she can claim the tuition credit.  You'll pay about $480 more tax, but she should get up to $2500 ($1000 minimum). 

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.

[macnchz]

so in total i would only have to pay like $108? since i wont technically be taxed on the full 15.5k amount?

[Hal_Al · Accepted solution]

Q. so in total i would only have to pay like $90? since i wont technically be taxed on the full 15.5k amount?

A. Yes.

$15, 500 - $14,600 (standard deduction) = $900 taxable income.  All in the 10% tax bracket. 

If you use the loop hole, $19,500 - 14,600 = $4900 taxable income, $1100 at 10%, the rest at 12%.