Taxable scholarship across two calendar years

[FEDUKE404]

The dependent of a client has a full scholarship, meaning of course that there will be taxable amounts to report as income on line 7 of Form 1040 with the appropriate "SCH" annotation. Yes, the darn kiddie tax kicks in also.

Here is the issue: The student receives a Form 1098-T with the usual "issues" there. The scholarship amounts are always on a calendar year basis (late January payment for spring semester), whereas the corresponding qualifying expenses are. . .elsewhere.

It's my understanding that, when figuring taxable scholarships, you more or less have to do things "backward" and START with the amount of the scholarship received (and when the scholarship was "paid") and then reduce it by all eligible expenses. Yes, for all intents and purposes the exact opposite of what you do when figuring education credits et al.

(There is an excellent discussion here: http://www.nysscpa.org/cpajournal/20...ntials/p54.htm )

At issue here is when the qualifying expenses were deemed to be "paid" by the scholarship, as apparently it is an internal swapping of funds within the bursar office. For the spring semester, the books are leveled sometime in late January of the calendar year involved.

Does anyone have any suggestions and/or cites showing exactly how to handle this two-year issue? The theory is a lot clearer to me than how to implement that theory!!

I'll leave you with this excerpt from the above link: "A student’s Form 1098-T for 2003 shows qualified tuition and expense amounts in Box 2 and scholarship and grant amounts in Box 4 that indicate some scholarship income may be taxable. From experience, the preparer knows that this university incorrectly includes January through March 2004 grants and scholarships in Box 4 but does not post qualified expenses for the same period in Box 2. Does the preparer “adjust” the Box 4 amounts and report the correct amount of scholarship income, or have the taxpayer pay the tax on the difference between Box 2 and Box 4 as shown on the Form 1098-T? Again, the answer is obvious: The preparer must prepare the most correct return based on the information available."

Thanks in advance.

FE

[Burke]

I always get the actual printout of amounts paid from the college and use that. It is usually pretty clear when tuition/fees are billed and when payments (including scholarships) are posted. Students and/or parents can go on-line and print this out if they have the proper ID #'s and/or passwords for their account. Thus ignoring the 1098-T altogether.

[FEDUKE404]

Further explanation

I always get the actual printout of amounts paid from the college and use that. It is usually pretty clear when tuition/fees are billed and when payments (including scholarships) are posted. Students and/or parents can go on-line and print this out if they have the proper ID #'s and/or passwords for their account. Thus ignoring the 1098-T altogether.

Your approach is that used by most preparers - essentially ignore the Form 1098-T and work with the facts and timing. Good idea for education credits, etc.

Issue here is WHEN does a scholarship become potentially taxable? Example: For the spring semester, a student has qualifying expenses "billed" in December (and shown on the Form 1098-T). No one pays anything - it IS a full scholarship. (No education credits are ever considered by the taxpayer.) In late January of the following year, the school "applies" the scholarship to qualifying expenses as well as to (taxable) room/board/whatever. This obviously generates taxable income.

Does the taxable income go in the "December" year or in the "January" year? At risk of repeating myself, the scholarship "payment" is shown only in the "January" year Form 1098-T. (And the corresponding qualifying expenses are shown in the prior year Form 1098-T.)

I feel fairly strongly the taxable income will end up in the "January" year. Where things get tricky is freshman year and senior year, when numbers get distorted. Assuming costs are same and scholarships are same, does freshman calendar year report one or two taxable scholarship "gains" ? (Spring semester was processed as described above, and fall semester clearly has scholarship "payments" in the same calendar year.)

Maybe I'm reading things too closely?

FE

[Burke]

If the full scholarship is for the Spring semester and it is posted in January, it becomes taxable then, IMO. The billed amounts on the 1098-T are immaterial in this case. (And in most cases.) Only the actual amounts paid would be considered. I don't even know why the Amount Billed box is on there.