Rambling thoughts about taxable scholarship

[Larmil]

Client has a dependent son in his first year in a degree program in college. Son's scholarship exceeds cost of tuition, books, fees etc. The excess was used to pay room and board. That excess is taxable to the son. College was in the Midwestern Disaster Area. To the extent allowable under the MDA rules that excess that is taxable to the son also entitles the parents to claim the Hope Credit. Is my thinking flawed?

[Koss]

Sounds right to me...

But I don't think the amount the parents can claim for purposes of the Hope Credit is limited to the taxable portion of the scholarship.

They might be able to take the credit based on the total expenses for room and board, regardless of what portion was paid with the scholarship. The MDA rules limit the amount of allowable room and board expenses to the greater of: (a) an amount determined by the school's financial aid office (the housing component of the "cost of attendance"), or (b) the amount actually paid, if the student is living in campus housing.

Pub. 970 says that you can't take a credit for any educational expenses that were paid for with tax-free benefits, such as scholarships and grants. But on your fact pattern, the room and board were not paid for with tax-free benefits. They were paid for with a taxable scholarship.

So, yes, I agree with your reasoning. But the taxable amount of the scholarship does not establish a "ceiling" on expenses for room and board.

BMK

[Larmil]

But I don't think the amount the parents can claim for purposes of the Hope Credit is limited to the taxable portion of the scholarship.

They might be able to take the credit based on the total expenses for room and board, regardless of what portion was paid with the scholarship. The MDA rules limit the amount of allowable room and board expenses to the greater of: (a) an amount determined by the school's financial aid office (the housing component of the "cost of attendance"), or (b) the amount actually paid, if the student is living in campus housing.

Pub. 970 says that you can't take a credit for any educational expenses that were paid for with tax-free benefits, such as scholarships and grants. But on your fact pattern, the room and board were not paid for with tax-free benefits. They were paid for with a taxable scholarship.

So, yes, I agree with your reasoning. But the taxable amount of the scholarship does not establish a "ceiling" on expenses for room and board.

BMK

Thank you. I had no problem with the additional amount pay for R&B, just the scholarship being taxed to the son and the parents getting the credit.