Dependent or Not

[jimfrombx]

Parents (unmarried) each make $13,000. Two children in College.
One child's 1098 shows Scholarships of $15,000 and tuition of $5,000.
The Room and board cost over $9,000, and was paid from Scholarship.
Based on above info would that mean:

1. Child (22) provided more than 1/2 of their own support and therefore is not a dependent?

2. If, or not, a dependent, would child have to file a return showing $10,000 of income from Scholarship? (Pell and TAP)

3. College transcripts show additional $3,000 as "private scholarships" and are not listed in totals on 1098-T.
Should these amounts also be reported as income, if not offset by qualified Educational Expenses?

[Koss]

Taxable Scholarship

I'll try to answer Questions 2 and 3 first. But you won't like my answer.

It definitely sounds like you are dealing with a taxable scholarship. The children will almost certainly need to file returns, and may well have some tax liability. To determine exactly how much of the scholarship is taxable, you should not rely on Form 1098-T. There is near universal agreement in this community that the data provided on those forms is utterly worthless. You need to use the student account statements, and in your case, you'll need detailed information from the student and the parents about expenses that may not have been paid directly to the school, and therefore may not appear on the account statements.

I don't know what TAP means. But any form of financial aid that does not have to be repaid is considered a scholarship for tax purposes.

Your first question is actually the easy part.

According to Publication 17:

A scholarship received by a child who is a full-time student is not taken into account in determining whether child provided more than half of his or her own support.

It doesn't matter whether the scholarship is taxable or nontaxable. It simply doesn't count as support. It is not support provided by the child, and it is not support provided by the parent. It is not support provided by the state or some other third party. It is not support.

Looks like the students are still dependents, and even qualifying children for purposes of EIC.

BMK

[jimfrombx]

Thanks BMK,

I missed the support part in Pub 17.
I concur with the value of the 1098-T and quite frequently ask for transcripts from the school to determine what really occured. As the parents have ITIN's I wasn't worried about EIC. Was hoping child could use their exemption to reduce liability but that won't happen.

Jim

[dtlee]

I'll try to answer Questions 2 and 3 first. But you won't like my answer.

It definitely sounds like you are dealing with a taxable scholarship. The children will almost certainly need to file returns, and may well have some tax liability. To determine exactly how much of the scholarship is taxable, you should not rely on Form 1098-T. There is near universal agreement in this community that the data provided on those forms is utterly worthless. You need to use the student account statements, and in your case, you'll need detailed information from the student and the parents about expenses that may not have been paid directly to the school, and therefore may not appear on the account statements.

I don't know what TAP means. But any form of financial aid that does not have to be repaid is considered a scholarship for tax purposes.

Your first question is actually the easy part.

According to Publication 17:

A scholarship received by a child who is a full-time student is not taken into account in determining whether child provided more than half of his or her own support.

It doesn't matter whether the scholarship is taxable or nontaxable. It simply doesn't count as support. It is not support provided by the child, and it is not support provided by the parent. It is not support provided by the state or some other third party. It is not support.

Looks like the students are still dependents, and even qualifying children for purposes of EIC.

BMK

Burton,

Not specifically to this situation, but more in terms of the treatment of scholarships in general....

While I agree that Publication 17 and most other interpretations of the Qualifying Child rules interpret scholarships as not ever being considered for purposes of support, I would like your opinion on a flaw created back in 2004 when they never changed how that part of the law was written.

When the Uniform Definition of a Child rules came into being, they never changed the wording of 152(f)(5):

Special support test in case of students .—
For purposes of subsections (c)(1)(D) and (d)(1)(C), in the case of an individual who is—

(A) a child of the taxpayer, and
(B) a student,

amounts received as scholarships for study at an educational organization described in section 170(b)(1)(A)(ii) shall not be taken into account.

I do not take this use of "child" to be "Qualifying Child" in this section since they define "child" as follows in 152(f)(1):

Child defined.—

(A)In general .—
The term "child" means an individual who is—

(i) a son, daughter, stepson, or stepdaughter of the taxpayer, or
(ii) an eligible foster child of the taxpayer.

(B) Adopted child .—
In determining whether any of the relationships specified in subparagraph (A)(i) or paragraph (4) exists, a legally adopted individual of the taxpayer, or an individual who is lawfully placed with the taxpayer for legal adoption by the taxpayer, shall be treated as a child of such individual by blood.
(C) Eligible foster child .—
For purposes of subparagraph (A)(ii), the term "eligible foster child" means an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

While the Master Tax Guide, TTB, and others all agree that you always ignore scholarships, I believe that the code clearly says that they are only ignored when determining support of a child with relation to the parents of that child (i.e., not a brother, sister, aunt, uncle, etc).

I have never seen anything more official than a publication which interprets this to mean that support always excludes scholarship money.

Hence, if I had a situation where John (a full-time student) lives with his mother and grandmother and Total Support for Johnny is $45,000 including his $30,000 college scholarship which covers his college studies, I think the law tells me this:

When considering if John is a Qualifying Child of his mother, we use the total support as $15,000 and consider whether or not John has provided more than half of this amount. However, when considering if John is a Qualifying Child of his grandmother, we use the $45,000 figure.

Then, you have the question of whether or not the scholarships are considered support provided by John or support provided by someone else, but that is a separate question.

Apparently everyone knows the code is wrong, but it still remains (in my mind) quite clear. Do you know of anything that corrects this defect in the way the code is worded?

Thanks for your time.

[Gary2]

Apparently everyone knows the code is wrong, but it still remains (in my mind) quite clear. Do you know of anything that corrects this defect in the way the code is worded?

To the best of my knowledge, the IRS considers that a feature, not a bug. The scholarship as support exemption only applies to the parent/child relationship, not grandparent/grandchild, etc.

[dtlee]

To the best of my knowledge, the IRS considers that a feature, not a bug. The scholarship as support exemption only applies to the parent/child relationship, not grandparent/grandchild, etc.

Gary,

It may be a "feature" but the IRS publications continue to ignore this difference in computing support from the perspective of different relatives.

Do you consider scholarships to be support provided by the child (who won the scholarship and would have taxability of the scholarship under certain circumstances) or from the school or other donor of the money?

I have treated such money as unearned support provided by the child when computing if the child provided more than half of his/her own support (for non-parent taxpayers) but am wondering what others believe.