Taxable Scholarship

[marcielynn1975]

My daughter is a college student in Illinois. She has received a scholarship from her school, National Merit Scholarship, and federal Pell and SEOG Grant's. I have calculated the amount that is taxable and have figured out how to report it on her federal return. The state return is where I get confused. She will be filing an Indiana return because she is a resident of Indiana and has earned income in Indiana. Does the taxable scholarship amount get reported to Indiana or does she have to file an Illinois return? Also, since all scholarships/grants are not specifically awarded from Illinois is the entire taxable amount subject to being taxed by Illinois?

[pauls]

I'm looking for the same answer

[marcielynn1975]

I never did find an "official" answer even after emailing the Illinois Dept of Revenue (they never replied). I did however learn through other threads on other sites that we did in fact have to file in Illinois. We actually ended up being taxed for the scholarship amount in both Illinois and Indiana but was also given a credit for taxes paid to another state when we filed the Indiana return. At this point in time both the federal and Illinois returns have been accepted. Hope this helps you somewhat.

[MaryK1]

In general, scholarship income is taxable only if it is not used for qualified educational expenses.  Taxable scholarship is reported in the resident state (unless specifically exempted), but the laws of the specific state of the school must be referenced to see if the income is taxable. 

As a nonresident of Illinois, the state taxes your daughter on "state source" income.  This includes compensation, capital gains on property with situs in the state, and prize money from the Illinois lottery.  The statute does not specifically include or exclude scholarship income.  Other states (see Mass.) specifically state that only scholarship income that is tied to services (student teaching, research assistant) are state source income. 

Illinois 35 ILCS 5/301