Scholarship Income

[Snaggletooth]

A graduate student is in the 15% tax bracket.

He has a 1099T showing $6000 in expenses, but $6000 in scholarships
to cover. A wash, right?

Well maybe not. What if we claim the $6000 as "Other Income?"
He would be taxed at a rate of 15%. The $6K does not take him into
a higher tax bracket.

Then he should be eligible for Lifetime Learning Credit, which is 20%.

So we pay $900 in taxes, but then we get a $1200 credit. Net advantage
to the taxpayer is $300. Where have I gone wrong? Nowhere I hope.

I've not had this happen before. Thanks in advance for your responses.

[S T]

Lifetime Credit

Isn't the Lifetime Learning Credit a non refundable credit?

So if tax is $900, Credit is limited to $900.

Sandy

[Snaggletooth]

You are correct

Sandy, you are correct, but there exists some $3000 in tax prior to the credit.
I should have made that clear. Ron J.

[S T]

I don't think you can

If you look at Pub 970 under claiming Lifetime Learning Credits, page 21 "No Double Benefit Allowed", you cannot do any of the following:

"Claim a credit based on qualified education expenses paid with a tax-free scholarship, grant or employer provided educational assistance." See adjustments to Qualified Education Expenses, later."

Adjustments to Qualifed Education Expenses "If you pay qualified education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assitance and refund(s) you received.

So it seems if t/p expenses are qualified, they must be reduced by the scholarship amount before being eligible for the Lifetime Learning Credit.



Sandy

[Snaggletooth]

Good Answer

Good Answer, Sandy, as usual. One of the best researched members of the board.

The "scholarship," however might be considered tax-free, but it might also be considered compensation. The scholarship money is coming from the State of Tennessee, but the acceptance of the agreement requires the recipient to teach Special Education somewhere in the state of Tennessee for the next five years.

Since there is legal "consideration", can this tuition assistance be considered compensation?

[S T]

Okay well

Since you are making me work for this, (Interesting and I need a diversion)

Pub 970 page 4-6 and there is a worksheet!


Payment for Services: "Generally you must include in income the part of any scholarship, fellowship or tuition reduction that represents payment for past, present, or future teaching, research or other services" This applies even if all candidates for a degree must perform the services to receive the degree.

However, there are Exceptions: If t/p doesn't fall under those exceptions, which seem a little confusing to me, because the "AND",so I don't think your t/p does based on what you have provided. But take a look at Example 2. Quotes "The terms of your scholarship require you to perform future services. A substantial penalty applies if you do not comply. The entire amount of your grant is taxable as payment for services in the year it is received." Seems like you need a penalty factor in the agreement.

So your t/p scholarship income might fall under that as compensation. A little further down the page it tells how to report the Scholarship money as Income if taxable, So looks like maybe on Line 7 I am sure you have it but here is the link to Pub 970 http://www.irs.gov/pub/irs-pdf/p970.pdf

Sandy

[Gene V]

Good information Sandy, Here is a little clip from TTB 12-3.
If a student receives a scholarship that can be used to pay any type of expense (unrestricted scholarship), taxpayers may benefit by applying the scholarship frunds to nonqualifying expenses. Although the student is taxed on the scholarship, the student or other taxpayer may be able to claim an education credit higher than the tax.

"DID YOU KNOW? Not all scholarships are alike! Taxpayers do not have the option to include restricted scholarships in income in order to claim an education credit if the scholarships must be used to pay tuition and fees."

[JG EA]

May I ask a question on this?

from TTB 12-3.
If a student receives a scholarship that can be used to pay any type of expense (unrestricted scholarship), taxpayers may benefit by applying the scholarship frunds to nonqualifying expenses. Although the student is taxed on the scholarship, the student or other taxpayer may be able to claim an education credit higher than the tax.

"DID YOU KNOW? Not all scholarships are alike! Taxpayers do not have the option to include restricted scholarships in income in order to claim an education credit if the scholarships must be used to pay tuition and fees."

So, would this be a correct statement? You have to pay out of your pocket (or be taxed on) the amount you use as a credit. But if a scholarship won't let you spend that scholarship for anything else but tuition, there's no credit to be taken on that tuition because you didn't pay for it and aren't being taxed on it.

[S T]

More

I guess Snag will be the one to determine whether or not the Scholarship is restricted, pub 970 gives an example, but a W-2 is issued in the example , and that information has not been furnished on the post. Part wages and part education expenses. Wage part becomes taxable.

Sandy

[Snaggletooth]

No more expense

I read TTB before posting the question, as to claiming more expenses than
the 1098T covered. He declares the scholarship covered every item of expense
except living or commuting expenses. I don't believe this, but saw no point
in arguing. I think he just didn't want dig out of his head such things like books, lab fees,
etc.

Thanks to all - Snag