Scholarships - where taxable?

[JenMO]

Child received taxable scholarship from Arkansas. Child (and parents) are residents of Missouri. They are filing Federal return to claim, but does that mean child has to file Arkansas return, too? Where are scholarships taxable? Where child is resident or where child goes to college?

[Koss]

State of Confusion

Haven't heard that one before...

Does the child have any other income?

If so, is that income sourced to Missouri or Arkansas?

BMK

[Koss]

Residency

I'll assume for the moment that the child had no income in Arkansas except for the scholarship in question.

It sounds like you are taking the position that the child is a nonresident of Arkansas, i.e., the child is there only to attend school, with the intent of returning home to Missouri at the end of the term. And if the child was not working in Arkansas, that's probably a reasonable approach. It is consistent with the definition of a "temporary absence" from the home of the parents under federal tax law.

But the scholarship is sourced to Arkansas--not Missouri. That does not transform the child into an Arkansas resident--not even a part-year resident. It is not earned income. Yes, I know, it gets reported on line 7, as a "phantom" Form W-2. But it still isn't earned income. It is not subject to FICA.

File an Arkansas nonresident return for the child. Report the scholarship as Arkansas income.

BMK

[JenMO]

My thoughts, too, just confirming. Thanks

[FEDUKE404]

Wait a minute

I've never encountered this scenario, and in fact have only had a handful of taxable scholarships to deal with.

To be sure I understand this properly: Are you saying that if a full-time resident of Virginia (student...except for "temporary absence for school" issues...and parents live in VA) has a taxable scholarship to a university in Colorado, that the student has to file/pay income taxes to COLORADO on the taxable amount of the scholarship? And that would be in addition to reporting the income on the federal return and the Virginia return??

That just does NOT sound kosher. Why generate a tax return of any kind for Colorado ??

Are you sure????

Granted, things could get a bit sticky if the student had severed ties to mom/dad and the "home" state, but that does not appear to be the case being discussed here.

FE

[Koss]

Residency Issue

Yes, on your fact pattern, I think the scholarship would have to be reported on a Colorado return, as Colorado income, for a nonresident of Colorado. The student would likely get a credit on the Virginia return for the tax paid to Colorado.

To me it just feels like the scholarship income needs to be sourced to the state where it was paid, received, and used by the student (yes, I avoided the word earned, because it isn't earned income).

This isn't a perfect analogy, but...

Suppose you take a trip out of town, to another state, and while you are there, you win some sort of prize, like, say, you win concert tickets worth $700 because you were caller number 9 on a radio show. The radio station issues Form 1099-MISC, with $700 in box 3. I think the state you were visiting has the power to tax that income, even though you are a nonresident.

Same goes for gambling income...

BMK