Will scholarships count as income in 2019?

[jrb]

I have heard that scholarships will be counted as income in the new tax year.  Is this true?  My daughter has a full scholarship and I'm concerned about this bumping us up into a higher tax bracket, which we can't afford.

Would it be better for my daughter to file for herself, and us not claim her?

[Carl]

Scholarships, grants and 529 funds have "always" counted as income *INITIALLY* and that hasn't changed. The taxability of that income is offset by the qualified education expenses they are used to pay for. Then, if there is any left over, it counts as taxable income TO THE STUDENT and the student will pay taxes on that excess at the parent's higher tax rate.

Would it be better for my daughter to file for herself, and us not claim her?

Absolutely not. Your daughter will not get anywhere even close to the education deductions and credits that you as the parent will get. Also, if you don't claim her, that changes nothing for your daughter. If you just *QUALIFY* to claim her as your dependent, then your daughter must select the option for "I can be claimed on someone else's tax return." It doesn't matter if you actually claim her or not.

When it comes to claiming the student dependent the parents' have a choice. But the student has NO CHOICE, and must select the option for "I can be claimed..." no matter what the parent's do. Keep in mind that there is no requirement for he parent's to provide the student any support...not one penny. THe support requirement is on the student, and only the student.

Grants, scholarships, 529 funds, gifts from Aunt Mary, etc., do not count for the student providing their own support. The student must have "earned" income that they earned in the same tax year, and the student must have provided more than 50% of their own support with that earned income.

So in your case, if your daughter has a full scholarship, it's perfectly possible for her to earn a million dollars and still *NOT* provide more than 50% of her own support.

[AJ]

Carl provides you with clear and accurate advice to follow.  In addition, I suggest that you become familiar with the American Opportunities Tax Credit (AOTC), which can provide up to $2500 in credits.  Reducing your tax bill by $2500 can be a good deal.   For basic information on the AOTC, including qualifications and income limits, see https://www.irs.gov/credits-deductions/individuals/aotc 

The scholarship money that is spent on the tuition it is excluded from income.  However, some scholarships (you need to check your  case) can allow the student to essentially spend the scholarship money on support and thus allows paying the tuition using other funds.  Once you hit the $4000 limit for tuition and course-related books, supplies, and equipment, then don't spend more than that from your own funds if you can avoid it.  This action increases the part of the scholarship money that becomes taxable to the student.  However, that action can also make you, the parent who supports the student, eligible for the tax credit.  If eligible for the tax credit, the thousands of dollars provided by the credit is often a much better deal than the extra tax that the student has to pay.  Final item, keep track of money spent on course-related books, supplies, and equipment because these expenses count toward AOTC expenses and are not usually paid out of the scholarship funds.

[Michelle27]

Can you please clarify "it's perfectly possible for her to earn a million dollars and still *NOT* provide more than 50% of her own support." Thank you! We are still trying to understand if our 22 year-old qualifies or not! 

[Texas Roger]

If she made money and put it into savings, then what she put in savings is not included in determining whether she provided more than half her own support or not. Here is an IRS article that my help you: https://www.irs.gov/pub/irs-pdf/p501.pdf

You can use the worksheet on p. 15.

[AJ]

Please don't get hung up on the extreme-case examples. Here is a worksheet that the IRS provides in their VITA program.  https://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

The point is that it's NOT any absolute dollar value that determines the support requirement.  Instead, it is the ratio (50%) to the total household expenses.  In the extreme example presented here, a million dollars might not be 50% in an extreme case where the household is some huge palace with annual household expenses in the multiple millions.  Again, please don't get hung up on the dollars, and use the worksheet to calculate your own ratio.  The main point is that the parent usually will retain the dependency of a child, who is in school at least half time for a semester, once the value of the parent's home is considered for the support.