Q. TurboTax expert said that for state taxes, the federal income is used as the base, so you don't need to add the scholarship (foreign source) separately. We couldn't find a way to add it manually when filling out the state return. Should I amend it next year or as soon as possible?
A. Neither. As the TT expert said, it's already included in the federal AGI that transfers to the state return. You don't add it again to the state return ("The full amount of the scholarship, including the portion that covers tuition, is already reported under line 1h on the federal return").
Q. Should we have included the portion that covers tuition in the taxable amount?
A. Probably. Earlier, you said the grant was paid in foreign currency to a foreign bank account. Tax free scholarship is not usually paid in cash.
From IRS Publication 970: "A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution*.
A scholarship or fellowship grant is tax free only to the extent:
• It doesn't exceed your qualified education expenses;
• It isn't designated or earmarked for other purposes
(such as room and board), and doesn't require (by its
terms) that it can't be used for qualified education expenses; and
• It doesn't represent payment for teaching, research, or
other services required as a condition for receiving the
scholarship."
*Enter your school at the link below, to see if it's on the dept. of education list.
https://www.savingforcollege.com/eligible-institutions
