In a nutshell:
Colleges work in academic years. The IRS works in Calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:
- Scholarships and grants are reported as taxable income (initially) in the tax year they are received. It does not matter what tax year that money is *for*. (Taxability is offset by the qualified expenses the money is used to pay for.)
- Qualified education expenses are claimed/reported in the tax year they are paid. It does not matter what tax year is paid *for*.
If the excess amount in box 5 was refunded to the student, then it's taxable income to the student. The student can offset that taxability if that money was used to pay qualified education expenses in the same tax year. But either way, it gets reported on the student's tax return.
It's also possible the school did not refund the excess to the student, but held on to it to apply it to 2021 qualified expenses. If that's the case, the program can and does deal with this just fine, so that the excess is not taxed, but is instead "carried over" (for lack of a better term). The program does not keep track of the carry over. It's up to the tax filer to keep track of that, for their taxes the next year.
