Taxable scholarship at out of state college

[thekruts]

My daughter (21 yrs old) is my dependent, is a Colorado resident, is a full time college student at an Alabama state university, and is under a full ride athletic scholarship.  Her 1098-T indicates a $19K scholarship (block 5) and qualified tuition/expenses of $8K (block 2); thus leaving her with $11K of taxable unearned income.  She is filing federal and state of Colorado returns.  Question is: Does she have to also file as a non-resident in the state of Alabama due to the unearned income coming from a college in that state?

[marcielynn1975]

Did you ever find an answer to this? I have the same question and cannot seem to find an answer.

[pauls]

I'm looking for the same answer.

[MaryK1]

The issue for state taxes and scholarship income for nonresidents is- whether the scholarship is state source income.  In general, a state taxes residents on all income regardless if source and nonresident pay tax on state-source income which includes services performed in the state.

The IRS considers scholarship income unearned unless services (such as teaching, research etc.) are required.  If this is the case, then the scholarship would be taxed to nonresident students.  (See https://www.mass.gov/directive/directive-95-9)

Most unearned income is not taxable to nonresidents so it would only be reported in the resident state.  While it is true that the scholarship is from an Alabama school which could classify it as state source income, other unearned income (think interest or dividends) is not state sourced to the location of the payer.