elizashinks Posted February 4, 2012 Report Share Posted February 4, 2012 Hello! I am a former ATXer and am so glad to see this forum has been brought back! My question is pretty simple, but I can not find anything exactly on point, and see some conflicting info, so hoping for some input from the community. If a taxpayers 1098-T reports both scholarships and grants, as well as qualified educational expenses, can the taxpayer ELECT to report the scholarships and grants as taxable income, in order to claim the education credit on the entire amount of qualified education OR - *MUST* the taxpayer first reduce the qualified educational expenses by the amount of the grants/scholarships received, and take the education credit only on the difference. Input appreicated and valued. Thank you! Eliza Quote Link to comment Share on other sites More sharing options...
jainen Posted February 4, 2012 Report Share Posted February 4, 2012 >>can the taxpayer ELECT to report the scholarships and grants as taxable<< There is no election available for that. I think you would have to have incredibly detailed records to support such a position, and that would not be, well, credible. If the scholarships and grants are used for qualified expenses they are tax free, and you can't pretend they aren't. And then you can't take a credit for expenses paid with tax-free assistance. Presumably the 1098-T shows such tax-free amounts. But Pub 970 does say "the amounts in boxes 1 and 2 of Form 1098-T might be different from what you actually paid." That's where good records are important. Quote Link to comment Share on other sites More sharing options...
GraceNY Posted February 11, 2012 Report Share Posted February 11, 2012 Hello! I am a former ATXer and am so glad to see this forum has been brought back! My question is pretty simple, but I can not find anything exactly on point, and see some conflicting info, so hoping for some input from the community. If a taxpayers 1098-T reports both scholarships and grants, as well as qualified educational expenses, can the taxpayer ELECT to report the scholarships and grants as taxable income, in order to claim the education credit on the entire amount of qualified education OR - *MUST* the taxpayer first reduce the qualified educational expenses by the amount of the grants/scholarships received, and take the education credit only on the difference. Input appreicated and valued. Thank you! Eliza Over the years, I too had seen conflicting information on this subject so I finally decided to delve into myself. Still having some unanswered questions, here's what I found: See § Reg.1.25A-5©(3)(i) below: (3) Scholarships and fellowship grants. For purposes of paragraph ©(1)(i) of this section, a scholarship or fellowship grant is treated as a qualified scholarship or fellowship excludable under section 117 except to the extent -- (i) The scholarship or fellowship grant (or any portion thereof) may be applied, by its terms to expenses other than qualified tuition and related expenses within the meaning of section 117((2) (such as room and board) and the student reports the grant (or the appropriate portion thereof) as income on the student's federal income tax return if the student is required to file a return; or (ii) The scholarship or fellowship grant (or any portion thereof) must be applied, by its terms, to expenses other than qualified tuition and related expenses within the meaning of section 117((2) (such as room and board) and the student reports the grant (or the appropriate portion thereof) as income on the student's federal income tax return if the student is required to file a return. The presumption is that for § 25A purposes a scholarship or fellowship is treated as excludable under § 117 unless one of the two conditions (see above) are met. This is illustrated in Reg. § 1.25A-5©(4), Example (1): The example states that University X charges student A a total of $8,000 ($3,000 for tuition and $5,000 for room and board) and awards Student A a $2,000 scholarship, the terms of which permit it to be used to pay any of the student's costs of attendence, including room and board. Student A pays the $6,000 balance due from a combination of savings and amounts earned from a summer job. Because student A does not report any portion of the award in income (and because the terms of the award do not require it to be used on non-qualified expenses), Student A is treated for purposes of calculating the education tax credit, as having paid only $1,000 ($3,000 tuition minus $2,000 excludible scholarship) of qualified tuition and related expenses. Also, see Reg. § 1.25A-5©(4), Example (2): The facts are the same as in Example (1), except that Student A reports the entire scholarship as income on the student's federal income tax return. Since the full amount of the scholarship may be applied to expenses other than qualified expenses (room and board) and Student A reports the scholarship as income, the exception in paragraph ©(3) of this section applies and the scholarship is not treated as a qualified scholarship under section 117. Therefore, for purposes of calculating an education tax credit , Student A is treated as having paid $3,000 of qualified tuition and related expenses to University X. Correct me if I am wrong, but it seems to me that one would have to look to the terms and conditions of the scholarship and/or grant to determine whether it was a "restricted" scholarship (must be used to pay qualified expenses) or an "unrestricted" scholarship (may be used to pay any of the student's cost of attendence such as room and board) first. But, are there any ordering rules if one determines that the scholarship is "unrestricted?" In other words, do you first apply any scholarship or grant money to qualified expenses and then to non-qualified ones or can you pick and choose? If the cost of education for the period exceeds the scholarship received, a student could argue that he/she used the scholarship for room and board and used other funds for qualified expenses; the scholarship would then be taxable. I don't beleive that Section 117 provides tracing rules for spending the scholarship? The Worksheet (1-1) contained in PUB 970, asks you to subtract out the amount of your scholarship that was used for qualified expenses in order to arrive at the tax-free part of the scholarship income. No where does it give you any ordering rules. Here's an actual taxpayer situation: According to the college's website, "scholarships and grants are financial aid that does not need to be repaid, and they will be applied to the comprehensive fee (my emphasis added) on your bill each semester, not paid to you directly." Tuition and Fees 2011-2012 Tuition: $42,000 Room: $ 6,000 Board: $ 5,000 Student Actvity Fee: $ 400 ------------ TOTAL $53,400 Comprehensive Fee Total Scholarship Awarded: $ $45,000 On the actual student's account transcript, there is no matching of the billing items with the scholarship amount. In other words, it lists the items above, applies the scholarship as a credit and bills for the difference. Without looking at the actual terms of the scholarship (I'm working on getting a copy of the award letter/agreement) and just going with the fact that the scholarship is applied to the comprehensive fee, can I legally allocate $11,000 of the scholarship monies to Room and Board and report in student's income? And, therefore, free up amounts to used for education credit? Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted February 12, 2012 Report Share Posted February 12, 2012 My answer is straitforward. NO Quote Link to comment Share on other sites More sharing options...
Pacun Posted February 12, 2012 Report Share Posted February 12, 2012 GraceNY, My answer is a yes, you can use a protion to claim education credit. But I would use a prorated portion of the scholarship to pay for each expense. You will have a little portion that will be taxable but you will have more than $7K to be used for the credit. If the student qualifies for the American Opportunity Credit, you only need $3K in expenses. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted February 12, 2012 Report Share Posted February 12, 2012 What supporting documentation do you have to support your position? I am in agreement with Jainen on this one. Look at example 1. Also, I agree it depends with looking at the terms of the scholarship as well. I don't read or see anything regarding a pro-rated calculation. I think the simple answer is you can't claim expenses for tax free assistance. Quote Link to comment Share on other sites More sharing options...
grandmabee Posted February 14, 2012 Report Share Posted February 14, 2012 there is an example in the quickfinder 13-8 that talks about making some of the scholarship taxable and taking the credit Quote Link to comment Share on other sites More sharing options...
Pacun Posted February 14, 2012 Report Share Posted February 14, 2012 Also, I agree it depends with looking at the terms of the scholarship as well. I don't read or see anything regarding a pro-rated calculation. I think the simple answer is you can't claim expenses for tax free assistance. There are three approches to this situation, which I will list after I quote the question from GraceNY. "According to the college's website, "scholarships and grants are financial aid that does not need to be repaid, and they will be applied to the comprehensive fee (my emphasis added) on your bill each semester, not paid to you directly." Tuition and Fees 2011-2012 Tuition: $42,000 Room: $ 6,000 Board: $ 5,000 Student Actvity Fee: $ 400 ------------ TOTAL $53,400 Comprehensive Fee Total Scholarship Awarded: $ $45,000" 1.- You could argue that client paid $8,400 for tuition. This will be a very agressive position and the IRS will not agree with that. 2.- You can take a very conservative approach and don't take the credit at all. 3.- You could prorate as I suggested and the IRS might not agree with you but the courts might have a different point of view. The fact that the instructions don't have your specific situation and DON'T mention prorating doesn't mean that prorating is not an option. Prorating is almost anywhere in accounting and taxes and if you can use it on other situations, you can use it here in this unique case. The instructions and Pub 17 are not taken seriously by the courts. See what payments the client has made and see the statement from the student's account from the University and that might give you more information and maybe you will be able to chose option 1 or 2 which are stated on the instructions. With the information you presented and if no other documentation to the contrary exists, I would go with prorating. Quote Link to comment Share on other sites More sharing options...
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