Tuition credit - kid pays some tax; parent gets big credit

[LCP]

Non-taxable scholarships are subtracted from tuition paid.

Assuming scholarships equal tuition; is it ok for the student to go ahead and pay tax on $2000 of scholarships at a 10% rate in order for the parents to have $2000 of tuition to get a full 100% credit for?

[KBTS]

I think this topic has been discussed on this board before, so a search might yield some more information. However, I believe what you are proposing is possible to do but you will need some additional information on the scholarships. If they stipulate they can be used for any purpose, you could choose to apply them to room and board expenses and thus make them taxable - freeing up the tuition costs for the education credits. If they specifically state they must be used for tuition, then you will not be able to do what you are proposing. Pub 970 might have some examples of this as well.

[taxea]

Who's SSN is on the 1098?

[taxmom34]

it doesn't matter who's SS is on the 1098, because the parent or student can take the credit

[Nashville]

SS# does matter

There is a difference, especially in this discussion, as to whose SS# is on the 1098-T.

The issue is the option of claiming the scholarship as income. If the taxpayer is the student, then we are speaking of claiming income on Line 21, and then taking credit on Form 8863 on the same return.

If the taxpayer's child is the student, then we are speaking of claiming the income on the child's tax return, but the parent taking the credit on their own return. The ramifications of this are far different.

[FEDUKE404]

Who's [whose?] SSN is on the 1098?

The student's Soc Sec number is always on the Form 1098-T, as he/she is the person for whom the document is prepared.

As for who can claim any credits, the student cannot claim the credit when being claimed as a dependent by the parents.

As for application of any funds received, I think if you read the fine print you will find the scholarship first has to be applied against the tuition/fees....you can't play games there. In fact, many scholarships are specifically set up (dollar for dollar) to pay such fees. It also keeps the student from having to deal with any "taxable income" issues.

FE

[Gretel]

If I understand the original post correctly room & board are not in the picture, only tuition. Then scholarships are applied to tuition anyway and the question remains if it is a choice to not apply all of the scholarships to tuition paid.

[LCP]

If I understand the original post correctly room & board are not in the picture, only tuition. Then scholarships are applied to tuition anyway and the question remains if it is a choice to not apply all of the scholarships to tuition paid.

That is the question.

Can't the student pay taxes on the scholarship he received if he wants to?

And by doing so does it cease to be a non-taxable scholarship or whatever the wording is such that it must be deducted from tuition to calculate credits?

[KBTS]

That is the question.

Can't the student pay taxes on the scholarship he received if he wants to?

And by doing so does it cease to be a non-taxable scholarship or whatever the wording is such that it must be deducted from tuition to calculate credits?

No, the student or your client needs to find out the details on the scholarships before you can proceed. An example of what you are trying to do is in Chapter two of Pub 970:

Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.

* The use of the money is restricted to costs of attendance (such as room and board) other than qualified education expenses.
* The use of the money is not restricted and is used to pay education expenses that are not qualified (such as room and board).

Example 1. Joan paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan.

The terms of the scholarship state that it can be used to pay any of Joan's college expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring an education credit (American opportunity, Hope, or lifetime learning), she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship).

Example 2. The facts are the same as in Example 1 , except that Joan uses the $2,000 scholarship to pay room and board, and, therefore, reports her entire scholarship as income on her tax return. In this case, the scholarship is allocated to expenses other than qualified education expenses. Joan is treated as paying the entire $3,000 tuition with other funds and can figure her education credit on the entire $3,000.

[FEDUKE404]

Excellent post!

But there remain a couple of issues to cloud the waters:

1 - Regardless of whether the "income" from the scholarship is reported, does that help any if the student is being claimed as a dependent by the parents, which is the common situation? Otherwise, it appears plausible the student could claim the scholarship as income and the parent could take the entire (unreduced) amount of qualifying education costs? Hmmm....now that really could muck up those newly refurbished kiddie tax rules.

2 - Does anyone know in reality how such scholarships are worded? It is my understanding that many/most are set up so as to pay no more than the qualifying expenses (hence creating no (potentially?) taxable income to the student), and may even stipulate such in the agreement. Along a similar line, I have encountered several situations where the scholarship exactly equals the qualifying education expenses, to include reimbursements for those in programs such as ROTC.

Of course, those students getting a "Cadillac" scholarship for a free ride through college can definitely expect some tax implications.

FE