Hope & Lifetime Learning Credits

[tpnl]

Does anyone know why scholarships and grants must first be deducted from tuition? Sometimes grants and scholarships are enough to cover tuition but not room and board. Then the taxpayer receives no credit for paying for college expenses.

[ChEAr$]

Why?

Does anyone know why scholarships and grants must first be deducted from tuition? Sometimes grants and scholarships are enough to cover tuition but not room and board. Then the taxpayer receives no credit for paying for college expenses.

Easiest answer is because that's how congress, in it's finite wisdom, wrote the law.
And where it is written that all students should get credits?

But a larger problem is that of the scholarships which are sufficient to cover tuition and books and room and board. How much of that do you reckon is actually taxable?
(A lot of people forget this point.)

[Koss]

Qualifying Educational Expenses

Does anyone know why scholarships and grants must first be deducted from tuition? Sometimes grants and scholarships are enough to cover tuition but not room and board. Then the taxpayer receives no credit for paying for college expenses.

Room and board are not "college expenses."

Everyone has to have food and housing, even if they are not enrolled in college. These expenses have absolutely no connection to higher education.

Room and board are not educational expenses as this term is defined by the Internal Revenue Code.

Room and board are included in the cost of attendance for purposes of calculating the student's financial aid eligibility. But that has nothing to do with federal tax law.

Welcome to the world of multiple definitions.

Burton M. Koss
koss@usakoss.net

[Koss]

Taxable Scholarships

Easiest answer is because that's how congress, in it's finite wisdom, wrote the law.
And where it is written that all students should get credits?

But a larger problem is that of the scholarships which are sufficient to cover tuition and books and room and board. How much of that do you reckon is actually taxable?
(A lot of people forget this point.)

That part isn't really all that complicated. If the scholarship exceeds the cost of tuition, books, and other qualified educational expenses (such as safety goggles for a chemistry class, art supplies, etc.), then the excess amount is taxable, and is reported on Line 7.

The issue that seems to come up every year is that pesky question about whether the books have to be purchased from the school...

I'll wait until someone asks the question before pontificating on this matter...

BMK

[ChEAr$]

Lol!

That part isn't really all that complicated. If the scholarship exceeds the cost of tuition, books, and other qualified educational expenses (such as safety googles for a chemistry class, art supplies, etc.), then the excess amount is taxable, and is reported on Line 7.

The issue that seems to come up every year is that pesky question about whether the books have to be purchased from the school...

I'll wait until someone asks the question before pontificating on this matter...

BMK

Far be it from me to ask! grin

[Kram BergGold]

Whoa!

Most schorlorships do not have to be deducted from tuition first. Unless the scholorship specifically says it is for tuition you can deduct it from room and board first. However, the amount you elect to apply tio R & B then becomes taxable scholorship income to the student. You do this to leave some or all of the tuition to qualify the parents for a Hope or Lifetime Credit, or maybe even the tuition deduction.

[New York Enrolled Agent]

Room and board are not "college expenses."

Everyone has to have food and housing, even if they are not enrolled in college. These expenses have absolutely no connection to higher education.

Room and board are not educational expenses as this term is defined by the Internal Revenue Code.

For purposes of Qualified Tuition Programs, I think the IRC says otherwise.

§529(e)(3) Qualified higher education expenses.

(A) In general. The term “qualified higher education expenses” means—

(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and

(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance.

(B) ROOM and BOARD included for students who are at least half-time.

(i) In general. In the case of an individual who is an eligible student (as defined in section 25A(b)(3) ) for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified tuition program) incurred by the designated beneficiary for room and board while attending such institution. For purposes of subsection (b)(6) , a designated beneficiary shall be treated as meeting the requirements of this clause.

[Koss]

Tuition

The section of the IRC that you are citing is not applicable to scholarships.

It applies to distributions from a savings plan set up by the parents under Section 529.

BMK

[FEDUKE404]

Two different definitions

The section of the IRC that you are citing is not applicable to scholarships.

It applies to distributions from a savings plan set up by the parents under Section 529.

BMK

Koss got there before I did.

What constitutes "college expenses" for tax credits/adjustments differs from those used to determine potential taxability of any Coverdell or similar withdrawals.

There is no doubt that some scholarships, especially the nicer ones, can create taxable income to the recipient. Few laymen are aware of this potential surprise, and I've yet to see a tax document from a school that is helpful. (The 1098-T is a step in the right direction, but quality control in the preparation of that document varies greatly between institutions.)

FE

[myerstaxes]

I just taught this section for VITA...The IRS guide used to teach this subject is quoted below...
" If the taxpayer paid qualified tution expenses with tax-free funds, a credit cannot be claimed for these amounts." "Qualified expenses must be reduced by the amount of any tax-free educational assistance received."
In the section on income it states..."Scholarships or Fellowship money used for tuition and fees to enroll at or attend an educational institution or fees, books, supplies, and equipment required for courses at the educational institution is nontaxable. Amounts used for room and board do not qualify for the exclusion and therefore are taxable."