Treatment of Taxable Scholarships for State Purposes

[Luna_Tax]

Hello everyone,

I apologize in advance for the length of my post.  I have a 2-part question regarding taxable scholarships.  Our son received a full scholarship in 2024 while he had received partial scholarships in 2022 and 2023 that were NOT taxable.  According to his 2024 Form 1098-T, he received about $30k in taxable scholarships, the difference between Box 5 (scholarships or grants) and Box 1 (payments received for qualified education expenses).  He had another $1k of other eligible education expenses (i.e. textbooks and fees) that reduced his taxable scholarship to $29k.  He also had about $20k in room and board costs that were fully paid by his scholarship monies.  Our Son also worked part time at his college and had about $6k in W-2 wages in 2024.  He goes to an out-of-state college in NC (i.e. his nonresident state) and is a resident of FL (i.e. his home state).

My understanding is that since a college student is "temporarily" living in the state they are attending college, they are considered a “nonresident” of that state for purposes of that state’s income taxes (NC for him) and are considered resident of their home state (FL for him).  Thus, income earned in the state the college is located should be filed as a "nonresident" of that state.

1- TurboTax ("TT") puts the $29k taxable scholarship on Schedule 1, line 8r (Other income-Scholarship and fellowship grants not reported on Form W-2) of his 2024 Form 1040.  I thought any taxable scholarships should show up on line 1 (wages) with SCH written next to it to let IRS know it is from scholarships.  Has TT treated the taxable scholarships correctly by putting it on Sch 1, line 8r?  To further clarify, this $29k taxable scholarship was NOT reported on his W-2 as taxable wages.

2-Florida, his home state, has no state income taxes.  On the other hand, he is a “non-resident” taxpayer For NC tax purposes.  According to NC DOR website, NC non-residents must file a return if their 2024 gross income from NC sources exceeds the standard deduction of $12,750 for single filers.  Does the $29k taxable scholarship need to be reported for NC state tax purposes?  I had heard that the taxable scholarships are only taxed in the home or resident state of the students and NOT in the non-resident state or where the college is located.  If that is true, we would not need to include this scholarship as a NC sourced income & therefore, no NC state taxes need to be paid.

Thank you in advance for your time and expertise.

[Hal_Al · Accepted solution]

Q.  I thought any taxable scholarships should show up on line 1 (wages) with SCH written next to it to let IRS know it is from scholarships. 

A. That's the old way (before 2022).

Q. Has TT treated the taxable scholarships correctly by putting it on Sch 1, line 8r?  

A. Yes. It's very important that it goes there*. Note how scholarships now get a line to themselves. 

Do not file a NC return.  Scholarship income is NOT considered sourced to state where the school is located. Instead, it is considered sourced to the student's home state.   There are exceptions where the states have written it into law, but NC does not appear to be one. 

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

Taxable scholarship goes on line 8r of Schedule 1, from which TT treats it as hybrid income.

[Luna_Tax]

I guess during my research I was looking at old articles & TT discussion forums & didn't realize the treatment of taxable scholarships had changed since 2022. Thank you for clarifying that.

That's great news that he doesn't have to pay NC taxes on the taxable scholarship. My son has paid 2 quarterly estimated tax payments for NC since initially we were under the assumption that we had to pay NC taxes on his excess scholarship. He will file a NC return to get a refund. Thank you again!