Two things here. First, it's highly probable the student does not claim any education expenses on the student's tax return at all. Not one penny. Most likely, the parent's claim it. That's covered later below.
Second:
- Scholarships, grants, 529 funds are claimed and reported as taxable income (initially) in the tax year they are received. It does not matter what year that scholarship, grant or 529 distribution may be *for*.
- Qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what tax year is paid *for*.
Now for the rules straight from the IRS, which most likely apply to your friend, meaning your friend reports nothing on their tax return when it comes to the education stuff. The reason I say "most likely" is because the question asked is common for a freshman college student, who doesn't yet understand how the taxes on this education stuff works. I'm mean, it's not like you learn this stuff through osmosis. 🙂
College Education Expenses
Colleges work in academic years, while 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 claimed/reported as
taxable income (initially) in the year they are received. It does not matter
what year that scholarship or grant is *for*
- Tuition and other qualified education expenses are
reported/claimed in the tax year they are paid. It does not matter what year
they pay *for*.
Understand that figuring out who claims the student as a
dependent, and determining who claims the education expenses & credits, is
two different determinations. It depends on the specific situation as outlined
below. After you read it, I have also attached a chart at the bottom. You can
click on the chart to enlarge it so you can read it. If it’s still to hard to
read on your screen then right-click on the enlarged image and elect to save it
to your computer. Then you can double-click the saved image file on your
computer to open it, and it will be even easier to read.
Here’s the general rules gisted from IRS Publication 970
at http://www.irs.gov/pub/irs-pdf/p970.pdf
Some words are in bold, italicized, or capitalized just for emphasis. This is
because correct interpretation by the reader is everything. Take the below
contents LITERALLY, and do not try to “read between the lines”. If you do,
you’ll interpret it incorrectly and risk reporting things wrong on your taxes.
For example, there is a vast difference between “can be claimed” and “must be
claimed”. The first one indicates a
choice. The second one provides no choice.
Now there are two separate determinations to be made
here.
Who claims the student as a dependent.
-
Who reports all the education expenses and
claims all the education credits.
First, who claims
the student as a dependent?
If the student:
Is under the age of 24 on Dec 31 of the tax year and:
Is enrolled in an undergraduate program at an accredited
institution and:
Is enrolled as a full time student for one academic
semester that begins during the tax year, (each institution has their own
definition of a full time student) and:
the STUDENT
did NOT provide more that 50% of the
STUDENT’S support
(schollarships/grants received by the student ***do not count*** as the student providing their own
support)
Then:
The parents qualify to claim the student as a dependent
on the parent's tax return . Period, End of Story. But one thing I want to
point out here. The parents *QUALIFY* to claim the student. The parents are
*NOT* required to claim the student as a dependent. But even if they don’t,
since they *qualify* to claim the student, then if the student will be filing
their own tax return the student is *REQUIRED* to select the option for “I can
be claimed on someone else’s return”. To
reiterate:
If the student qualifies to be claimed on the parent’s
tax return, then the student can not take the self-exemption on their own tax
return, no …matter…what.
Who reports all
the education expenses and claims all the credits?
If (and only if) the parents qualify to claim the student
as a dependent, *and* the parents actually are claiming the student as a
dependent, then:
The parents will claim all schollarships, grants, tuition
payments, and the student's 1098-T on the parent's tax return and:
The parents will claim all educational tax credits that
qualify.
If the student will be filing a tax return and:
The parents qualify to claim the student as a dependent,
then:
The student must select the option for "I can be
claimed on someone else's return", on the student's tax return. The student
must select this option even f the parent's qualify to claim the student as a
dependent, and the parents do not claim them.
Here’s when the
parents will claim the student as a dependent, but the parents will NOT claim
any of the education expenses or report the 1098-T on the parent’s tax return.
.If the amount of scholarships/grants/529 funds exceeds
the amount of qualified education expenses, then the student will report the education
stuff on the student’s tax return. The parent will know this when reporting the
education on their tax return, because the parent will not qualify for any of
the tax credits. (They only qualify for tax credits based on out-of-pocket
qualified expenses not covered by scholarships/grants.) Also, the parent’s will not qualify for the
credits depending on their MAGI which is different for each credit, and depends
on the marital status of the parent or parents.
In the case where scholarships/grants covers “all”
qualified education expenses, the parent’s don’t need to report educational
information on their dependent student at all – but they still claim the
student as a dependent if they “qualify” to claim the student.
If the
scholarships/grants exceed the qualified education expenses, then the student
will report the 1098-T and all other educational expenses and
scholarships/grants on the student’s tax return. The student will pay taxes on the amount of
scholarships/grants that are not used for qualified education expenses. However,
if the student’s earned income reported on a W-2, when added to the excess
scholarships/grants does NOT exceed $6350, then the student doesn’t even need
to file a tax return, and nothing has to be reported.
If the student has any other taxable income not reported
on a W-2, and it exceeds $400, (not including taxable portion of
scholarships/grants) then most likely it’s considered self-employment income.
That will require a tax return to be filed and the student will have to pay the
Self-Employment tax on that income.
Finally, regardless of the student’s W-2 earnings, if any
taxes were withheld on those earnings and it was less than $6350, then the
student should file a tax return so as to get those withheld taxes refunded.
1099-Q Funds
First, scholarships
& grants are applied to qualified education expenses. The only qualified
expenses for scholarships and grants are tuition, books, and lab fees. that's
it. If there is any excess, then it's taxable income. It automatically gets
transferred as follows depending on what type of 1040 you’re riling.
1040-EZ excess scholarship
income is included on line 1.
1040-A excess scholarship is included on line 7.
1040 Excess scholarhip is included on line 7.
Next, 529/Coverdell funds
reported on 1099-Q are applied to qualified education expenses. The qualified
expenses for 1099-Q funds are tuition, books, lab fees, AND room & board.
That's it. If there are any excess 1099-Q funds they are taxable. The amount is
transferred as indicated above with one exception. For the 1040 excess ESA/QTP
funds get transferred to line 21 with the annotation “SCH” next to it.
Finally, out of pocket
money is applied to qualified education expenses. The only qualified expenses
for out of pocket money is tuition, books, and lab fees. Room & board is
NOT a qualified expense for out of pocket money.
When you have a 1099-Q it
is extremely important that you work through the education section of the
program in the order it is designed and intended to be used. If you do not,
then there is a high probability that you will not be asked for room &
board expenses, and you could therefore be TAXED on your 1099-Q funds.
Finally, if "all"
qualified expenses are covered by scholarships, grants, 1099-Q funds and there
is ANY of those funds left over, the left over excess is taxable. While the
parent can still claim the student as a dependent, it is the student who will
report all the education stuff on the student's tax return. That's because the
STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.
