Excess Scholarships and Grants - Making it flow to line 7

[BulldogTom]

So I have a client who got approx. 10K in grants for the school year and her expenses were about 4K. I filled out the 1040 Ed Expense worksheet and it is giving her a refundable AOC credit and not adding the 6K to line 7.

Help with the mechanics of making this flow to Line 7 on the 1040 please.

Thanks

Tom

Hollister, CA

[Pacun]

Why don't you enter it on line 22 properly labeled? In this case the student will pay taxes on 6K and no credit, correct?

[Jack from Ohio]

There should be no credit and why do you want the excess to be taxed? Grants cover more expenses than tuition and fees which are all that is reported on the 1098-T.

ATX is not properly handling the situation when scholarships and grants are entered. They have been informed.

[BulldogTom]

"...why do you want the excess to be taxed?"

Pub 970 says if you receive more in grants than you have in eligible expenses, the difference is taxable and goes to line 7 on the 1040.

Tom

Hollister, CA

[Jack from Ohio]

"...why do you want the excess to be taxed?"

Pub 970 says if you receive more in grants than you have in eligible expenses, the difference is taxable and goes to line 7 on the 1040.

Tom

Hollister, CA

Eligible expenses is the key here.

[Pacun]

I wonder why the education credit is flowing if "amount paid" should be 0. I only enter a figure there when someone, other than grants or scholarships, pays.

[Richcpaman]

Tom:

The IRS instructions in this area contradict the tax court rulings. The IRS is having its cake here...

The IRS says the Scholarships and grants are used to pay tuition first. And once extinguished, there is no AOC/Credits/etc....

But the Tax Court ruled that a taxpayer can apply the scholarships/grants to other college expenses first, then to books, then to tuition, thereby, using up all the funds and nothing left over to be taxed.

The PPC 1040 deskbook described this sitch pretty good.

Rich

[BulldogTom]

Rich,

The client recieved 10K in grants because she is an orphan. But she only had about 4K in tuition, books, fees and related education expenses. Was at a community college for first half of 2013 and then at a State college for the rest of the year. Full time student. Used the rest of the grants for living expenses. I don't think your reference applies as the excess was not used in any way for education.

Am I not understanding what you are referencing correctly?

Thanks.

Tom

Hollister, CA

[RitaB]

Tom, I don't think the excess flows, and I don't why the program is giving her credit, either. On getting the excess to line 7, you can right click Form 1040, line 7, and pick the second option, there is a pre-printed list of line descriptions. I don't think "Excess Scholarships / Grants" is on there, but there are blank blue lines to write it in.

[Jack from Ohio]

I am still of the opinion that, unless the grant has specific requirements to be counted as income if certain criteria are not met, the excess above expenses are not taxed.

Some grants and scholarships have those requirements. Federal Pell grants and scholarships have no such qualifiers.

[BulldogTom]

She recieved a Cal Grant B and a Pell Grant. Semester #1 she had approx. 3,200 Cal Grant B and 750 educational expenses at the Community College. Semester #2 she received approx 6,500 Cal Grant B and Pell Grant. She had Approx 3,250 in education expenses. The rest of the money was used for room and board. Her income is approx $9,000 from her summer and part time jobs. Tax difference by not including into income is about $500. Very round numbers here.

Tom

Hollister, CA

[joanmcq]

There is a description on the line 7 worksheet. It prints SCH next to line 7

[RitaB]

Oh, yeah, line 4. Haha, thanks, Joan.

[Richcpaman]

Tom:

This line: "The rest of the money was used for room and board."

THAT is what I am talking about. She used the money for R&B at the college first, books, then tuition, etc. So that way, there is no $$ left over subject to tax.

The Tax Court ruling supported this treatment. IRS Pub 970 has it going the other way, but that is the IRS writing rulings to benefits them, and NOT the taxpayer. I am sorry, but when the court rules, that is law, when the IRS interpetes, its just rules.

Rich

[BulldogTom]

Rich,

Do you have a court case cite? I would like to look that up.

Thanks

Tom

Hollister, CA

[kcjenkins]

TAXATION OF RECIPIENTS OF SCHOLARSHIP/FELLOWSHIP GRANTS

Since 1954, the Internal Revenue Code has contained a provision that permits the recipient of a scholarship or fellowship grant to exclude some or all of the grant from gross income. This provision is set forth in section 117 of the Code and, at least until 1986, generally permitted the entire amount of most scholarship and fellowship grants to be excluded from the recipient's gross income. In 1986, however, Congress drastically limited section 117 by restricting the exclusion to cover only those portions of a scholarship/fellowship grant that Congress believed were directly related to education, such as tuition, fees, and books. Those other elements of typical scholarship/fellowship grants, such as room, board, and travel, were considered by Congress to be non-educational and therefore ineligible for the section 117 exclusion.

As a result of the 1986 changes to section 117, the current rule relating to the taxation of scholarship/fellowship grants is that the grant must be broken into its different component payments (tuition, fees, books, room/board, travel, etc), with each component payment analyzed separately. A payment will qualify for the section 117 exclusion only if:

The payment is a "qualified scholarship;"
The recipient is a "candidate for a degree;" and
The award is for the purpose of conducting study or research at an "educational organization."
Each of these terms requires further explanation.

The "Qualified Scholarship" Requirement -- An amount will be treated as a "qualified scholarship" if it is a payment for either (i) tuition and fees required for enrollment or attendance at the educational institution, or (ii) fees, books, supplies or equipment required for courses of instruction. Note that the fees, books, and other non-tuition items must be "required" for either enrollment or a course of instruction. Voluntary fees and "suggested" books and supplies do not qualify.

The "Candidate for a Degree" Requirement -- The definition of a "candidate for a degree" is broader than one might initially expect. It includes, of course, those individuals who are actually enrolled in a degree-seeking program, but also covers enrolled students who are not actually seeking a degree, as long as the educational institution that the person attends offers degrees and is properly accredited. For example, an individual who receives a one year fellowship to study at ASU is a "candidate for a degree" for purposes of section 117 even though the individual will not receive a degree at the end of the fellowship because ASU is an accredited educational institution that offers degrees.

The "Educational Organization" Requirement -- Finally, the "educational organization" test is easily met in most instances because it simply requires that the institution have a faculty, a curriculum, and a regularly enrolled body of students.

If a payment meets all three of these tests, it is excludable from the recipient's gross income; however, if any part of a scholarship/fellowship payment fails any one of these tests, the payment is taxable to the recipient. The most common taxable elements of a scholarship/ fellowship are room, board, and travel payments because they do not meet the "qualified scholarship" test.

[BulldogTom]

There is a description on the line 7 worksheet. It prints SCH next to line 7

Thank you Joan, that is exactly what I was looking for. You have to do the calculation of the excess amount by hand and enter it there, but the software handles it correctly once you enter it on the worksheet for "Scholarships and Grants not included on form W2".

You are the bomb. Thanks again.

Tom

Hollister, CA

[RitaB]

Thank you Joan, that is exactly what I was looking for. You have to do the calculation of the excess amount by hand and enter it there, but the software handles it correctly once you enter it on the worksheet for "Scholarships and Grants not included on form W2".

You are the bomb. Thanks again.

Tom

Hollister, CA

Hey, at least I was on the right worksheet. I'm still a firecracker, right?

[BulldogTom]

Hey, at least I was on the right worksheet. I'm still a firecracker, right?

A firecracker. Yes, that might be a good description. Something that seems fun to play with but touch a match to it an it explodes and does damage to anything around it. On second thought, dynamite might be a better comparison.

You are the bomb too...just a bigger boom.

Tom

Hollister, CA

[RitaB]

Thanks. I think.

[Lion EA]

So, a firecracker, is that the opposite of a pineapple?!

[RitaB]

So, a firecracker, is that the opposite of a pineapple?!

Well, yes it is. Not as much fiber, but loud and pointless will get you places.

[Lion EA]

And, where do frikkin bananas fit along that spectrum? They have lots of fiber but are very soft.

[RitaB]

And, where do frikkin bananas fit along that spectrum? They have lots of fiber but are very soft.

I don't know, but I'm thinking about warm Corona, and I don't even drink. It's that kind of day...

[Jack from Ohio]

Frikkin Banana Pudding is the best!!