Q. Does the mandatory $1485 meal plan get taxed as income?
A. Yes, but not exactly.
Taxable scholarship, including Pell grants, is the amount of the scholarship that exceeds qualified educational expenses (QEE-tuition, fees and undergraduate course materials). Technically, her taxable amount is $901 (7472 - 6033 -488 -50 = 901). If she needed to buy a computer, it can be reduced further. For tax purposes, there is no distinction between Pell money and other scholarship $.
if you dependent had no other income and her grants do not exceed her QEE by more than $12,950, she does not need to file a tax return.
But, wait there's more.
There is a tax “loop hole” available. 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 $7472 in box 5 of the 1098-T and $6033 in box 1. At first glance he/she has $1439 of taxable income and nobody can claim the American opportunity credit. But if she reports $5439 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 $533 in expenses for those course materials, paid out of pocket, she would only need to report $4906 of taxable scholarship income, instead of $5439.
The AOC is worth up to $2500, of which $1000 is refundable.
