How to handle outside scholarships paid directly to student?

[vayles]

We received a 1098-T from the college with the college's scholarship/grant amount. Our daughter also received $10,500 in scholarships through outside organizations, paid directly to her. All of it was used for 2016 college expenses, including $2700 of non-qualified expenses. We are claiming her as a dependent, and she has to file a return because of self-employment income. Which return should report the 1098-T and which should report the outside scholarships?

[JaimeG]

Was the $10.5K in scholarships reported with a 1099?

[vayles]

No - $10K was a check from a memorial fund awarded through the high school, $250 was a check from a high school booster organization, and $250 was a gift card from a local organization. The checks were deposited to her bank account. She used the gift card for books and supplies at college.

[JaimeG · Accepted solution]

The excess Scholarships are her income, and since she is filing her own tax return she will enter the $2700.00 above in TurboTax to be reflected on her tax return as if it were wages.

1. Go to Federal Taxes>   Wages and Income
2. Scroll to the Less Common Income section and choose Miscellaneous Income (the last choice) 
3. Choose Other income not already reported on a Form W-2 or Form 1099
4.  Answer Yes on the Other Wages Received screen
5. Continue past Wages Earned as a Household Employee and Sick or Disability Pay
6.  Answer Yes on the Any Other Earned Income screen
7.  Choose Other on the Enter Source of Other Earned Income screen
8.   Enter your scholarship information on the Any Other Earned Income screen.

This will report your scholarships on line 7 of your Form 1040, and you will not be subject to Self Employment Tax. Additionally your daughter will not be able to report the 1098-T on her return. The 1098-T will be reported on your return for Education Credit Purposes as she is your dependent. Remember that Good Record-Keeping is the key. Keep track of and properly account for all of the income and Education Expenses. Having digitized copies is a good idea especially with the advent of free cloud space with companies such as Microsoft and Google.  

[vayles]

Thank you!

[dill4fam]

Are these answers reviewed by CPAs or Enrolled Agents before being made “Recommended Answers”?!!

A scholarship portion not on a 1098-T that is used to pay for non-qualified education expenses is reported as Other Incone but categorized as a scholarship which is then included in Line 1 with a SCH notation. It is unearned income used to offset the standard deduction along with any other earned income. However taxable scholarships are taxed at the trusts & estates rates, NOT as self-employment (with FICA).

ONLY If the student has any other taxable earned income not reported on a W-2, and it exceeds $400, (NOT including taxable portion of scholarships/grants) might it be considered self-employment income. For example a student that receives a scholarship or “stipend”  in lieu of work performed then they should either receive a W2 or a 1099-MISC. This income would be taxed as regular EARNED income. If student received a 1099-MISC then it would be self-employment. (NOTE: Federal work-study pays you just like any other job, so the income is subject to federal and state payroll taxes and should be reported when you file your taxes. FICA taxes (social security and Medicare taxes) are exempt if you're enrolled for 6 or more credit hours or are working on campus.)

Please consult a tax professional who is knowledgeable with education expenses, scholarships/grants and federal education credits and deductions, so that your student is not overtaxed!