Scholarships

[Lion EA]

First time I've had a graduating college student on scholarships, so not sure where to look. Student graduated May 2020. Form 1098-T reports a $12,499 scholarship and zero tuition. Is the full $12,499 income? Other Income? Wages?

And, even worse, is it all subject to Kiddie Tax?

[Lion EA]

PS Same student received a $200 award from Colgate (his university) for graduating Summa Cum Laude. His mother says it was presented as a gift/award. Taxable?

This kid is leaving the country in two days, so mother wants me to accelerate his return. Two states, SE income, Kiddie Tax requires sister's and parents' information (high school sister just has a bunch of W-2s, but parents have 4 K-1s, 2 investment accounts, SS, lots of medical, etc., and a stack of paperwork I haven't sorted yet).

I appreciate any help.

[Margaret CPA in OH]

Have you checked Pub. 970?  I am looking also at QF Handbook.  It shows awards 'given for outstanding educational..winner is selected without any action on his part, winner is not required to perform services, and he assigns the prize (my emphasis) to a government unit or tax-exempt charitable organization.. is not taxable.  My bold is wondering if that means giving the prize over or noting that it was received from so not sure.

In Pub. 970, it says ' a scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree as an eligible educational institution...... and only to the extent:

*it doesn't exceed your qualified educational expenses;   and more on page 5 which you should read.

I can't imagine that there was no tuition although Box 1 may have been blank because it was not paid by outside funds.  Have you seen the account transcript?  I have had students with scholarships that, on the transcript, show as offsetting the tuition.

It would seem to start there and, if determined to be tax-free, I don't see how it could be subject to Kiddie Tax because it wouldn't be unearned (or earned) income which is taxable interest, divs, cg, taxable ss and pension payments, certain trust distributions, unemployment comp. and tribal gaming revenues (from QF).

Maybe someone else will chime in here but Pub. 970 is the place to start and clarify with client any conditions of the scholarship and get an account transcript.  I'm guessing the student didn't see any of it but if some was distributed as living expenses, that could be another issue.  Pub. 970 has a worksheet to determine what is excludable from gross income.

How nice that they give you so much time to do this 2 months after the due date and what, two whole days before kid leaves country. /s  I say rush job surcharge is in order!

[Lion EA]

All the things you said in your first paragraph are true EXCEPT that student did NOT assign his award to a government or nonprofit. Schedule 1 Line 8?

Parents/student paid tuition in December 2019 for January 2020 semester and graduated in May 2020. The Colgate statement for 2020 shows NO transactions. I wrote to student and his parents earlier today to ask if they made any payments to Colgate in 2020, maybe a loan...

Form 1040 Line 1?

Thanks for the lead to Pub. 970. My CCH AnswerConnect referred to it, but I'm going to download a .pdf now.

Mother had me do a pro forma about the first of the year before we had all documents, but she gave me a detailed list that included every penny and date EXCEPT NO MENTION OF A SCHOLARSHIP sans tuition!

Long-time clients with a partnership (I prepared that on time, bumping some clients in my queue, so I don't feel bad about not getting to the family's personal returns until now), two working students, and the parents (father has early-onset Alzheimer's so the mother now runs their business alone while the two college kids moved back home during the pandemic). The student I'm rushing was supposed to leave for his Fulbright in 2020, but that got postponed indefinitely due to the pandemic. Now, it's suddenly back on! (Next year I'll be researching Fulbright Scholarships.)

Thanx, Margaret.

[TexTaxToo]

The scholarship is taxable (Line 1 with notation 'SCH') - your software should have a place to put it so that happens automatically.  You can first subtract out the cost of books and other required fees, equipment, if any.

The Kiddie Tax does come into play if the kid is required to file.  The taxable scholarship income is unearned for purposes of the kiddie tax.

SImplest would be if there is no filing requirement.  If kid has no other income and $300 book expense so gross income drops below $12,400 - there is no filing requirement (scholarship income is treated as earned for purposes of the filing requirement), and you can forget the whole thing.

 

[Lion EA]

Mom thinks she did pay during 2020, so is checking... Good suggestion re books; hope he didn't buy his books until January 2020.

Kid graduated and was to leave for his Fulbright in the fall so started tutoring a neighbor family. When the pandemic didn't let up by the fall, he kept tutoring the same kids and has SE income of nearly $11,000. Definitely has a filing requirement.

I have the scholarship on Line 1 with SCH for now. Hope mom finds they paid in 2020 (it's an electronic system used by Colgate) so I can wipe that out. If not, then I'll make sure Kiddie Tax is there. Just finished sister's return with interest and dividends and am working on parents' to get it complete enough that the tax rate is correct and investments are entered.

Thanx so much, Tex.