Experience with full scholarship?

[FEDUKE404]

The child of a client has received a full ( = everything!) scholarship and will enter college as a freshman this fall.

It is my understanding that there will certainly be some taxable income to the student as a result of receiving such an award.

Since I've never had a situation like this, I wanted to see if anyone else has....

I assume there will be, in addition to the infamous Form 1098-T, a separate Form 1099 for the taxable income (more or less the value of room/board/some fees/etc). Will the school calculate that amount, or should I warn the parents of the pending situation and the need for keeping very detailed records? Will "freshman year" all be 2011 taxable income, or perhaps some in 2011 and the remainder in 2012? (The scholarship is automatically renewable so long as certain performance standards are met.)

Also, this scenario should completely negate any/all potential education tax credits but, all things being equal, should not be a factor in the parents meeting the tests for claiming the dependent. With a summer job, and the taxable scholarship income, the student may have fairly sizable taxable income. But college is not deemed to be support....or is it?!? What would have to occur, in this situation, for the parents to lose their expected dependency deduction?

Thanks in advance. I'm sure some of you have likely dealt with this type of scenario in the past.

FE

[Gary2]

First, most taxable scholarship income, if it's reported on an income document at all, should be reported on a W-2, not a 1099, but isn't subject to FICA. It gets reported on line 7 of the 1040, with the notation "SCH", and is considered earned income for most (but not necessarily all) purposes. Your software should have a way of flagging a W-2 as scholarship income.

If it's reported on a 1099-MISC, in either box 3 or 7, you may need to do more research to determine if the 1099 is correct, and possibly get it corrected. Conversely, keep in mind any of the exemptions; the one that comes to my mind is that VA housing allowance benefits aren't taxable, even if used for room and board.

Often there won't be anything other than the 1098-T reporting it, but it still gets treated as wages. As has often been mentioned here, the 1098-T frequently doesn't have enough information, so you should ask clients for an accounting transcript from the school. Furthermore, there will likely be expenses (such as books) that are qualified for exemption, but may not be on the school's records, so you should make sure the student keeps detailed records. (This is a good reason for the schools not reporting the scholarship income on a separate document, because they can't be sure that they know the taxable amount.)

The amounts will be taxable in the year received, another reason for getting the detailed records from the school.

Scholarship income is earned income for the purposes of the kiddie tax. It is not support (by either student or parents) for the purposes of the Qualified Child support, but only for the parents. If it were an aunt, uncle, or grandparent looking at taking the student as a dependent, then the scholarship income would be support provided by the student.

Finally, make sure that it's really scholarship and not a "full ride financial aid package," which typically includes a mixture of scholarships and loans.

[JON]

I think

unless the student has a "job like" part to his/her scholarship you will never see the amounts reported on a W-2 or 1099, I should say almost never. What other deductions can you take against the excess scholarship is a better question especially if in some type of graduate program.

[FEDUKE404]

Update (kinda)

My apologies to all for not responding earlier - but I was first trying to obtain some general information from the college involved. They quickly threw up the FERPA banner, and would not tell me anything even in the most general of terms in response to my inquiry as to how tax reporting documents for ALL recipients of this specific full-ride scholarship are handled. (This is a major university in a mountainous region of a southern state - think nearby Blue Ridge Parkway....)

Although there are multiple recipients of the same scholarship each academic year, I got nowhere as to "how" things, specifically taxable income, are reported to either the student or to the IRS. I specifically raised the question of whether a Form W2 would be issued, as others here have made reference to such. No student name was, or would be, ever discussed at this stage.

Here is the total response I received: "[school] issues a 1098-T to students who receive financial aid." Then the FERPA door slammed......

The best I can now expect is apparently receipt of an infamous/useless Form 1098-T and most likely no W2 from the school. It should be great fun dealing with "billed" amounts (when paid?), scholarship amounts (received when to apply to when?), and amounts received for items which are clearly taxable income within the IRS guidelines.

One option might be to fully ignore any potential education credit issues, then get out my trusty Ouija board and come up with an amount of taxable income to report somewhere/somehow on Form 1040. By so doing I can foresee some very creative error messages generated by my tax software.

So, if anyone in this tax community has any helpful suggestions, such would be quite welcomed.

FE

[Gary2]

I don't understand your concern at this point. By the time you're actually doing the taxes, the student will be able to provide you with an account transcript from the school's billing department. In any event, at a minimum, the amount shown as scholarship on the 1098-T, minus the amount shown as paid or billed, minus any receipts provided for books and supplies paid separately will be taxable. For a full ride without loans, that calculation off the 1098-T is very likely to be correct, since amounts will be paid at the time the scholarship is credited to the account, and they don't normally credit it more than one semester in advance.

There won't be any education credits if it's a full scholarship without loans.

[FEDUKE404]

Finding those numbers

I don't understand your concern at this point. By the time you're actually doing the taxes, the student will be able to provide you with an account transcript from the school's billing department. In any event, at a minimum, the amount shown as scholarship on the 1098-T, minus the amount shown as paid or billed, minus any receipts provided for books and supplies paid separately will be taxable. For a full ride without loans, that calculation off the 1098-T is very likely to be correct, since amounts will be paid at the time the scholarship is credited to the account, and they don't normally credit it more than one semester in advance.

There won't be any education credits if it's a full scholarship without loans.

My "concern" was to ask the experienced board members if they had encountered such a scenario before, and if so how they had handled it.

Certainly your explanation as to how I could calculate any taxable income has merit, and that approach may well be the one finally needed here. I, apparently in error, thought the school might issue a tax document (separate from any Form 1098-T). FWIW, I also expected some reasonable degree of cooperation from the school (absent student-specific issues) to what I thought were legitimate inquiries. Once again, I was in error.

Hopefully I can get reasonably close (for planning purposes) to the taxable income amount by noting the "normal" room/board, plus any educational travel fees (the scholarship "assists" with study abroad funds as well as domestic seminars), that the school pays. Of course, those payments may never show up except perhaps being included in box 5 of the Form 1098-T. Whether such payments would ever appear on an "account transcript" remains an unanswered question.

I also was trying to head off any potential Form 2210 underpayment issues, by at least considering current year estimated tax payments. For the current year I could probably slide by using Exception 1, but even eliminating any underpayment penalty concerns the student (actually the parents...) will still likely face a nice check to write come tax time. But such is an acceptable net price for a "free" college education, I guess.

Thanks for your input.

FE