Taxable Scholarship by choice

[Pacun]

I have a student whose parents will benefit if they make $4K of his scholarship taxable.  Is that still an option? 

I used to see a line that read that it would be more beneficial if a scholarship became taxable when I created efiles but now I don't see the line, neither do I see where I can make it taxable.

 

[Lion EA]

I don't know how you do the data entry in ATX, but it IS an option. You use $4,000 as "wages" with a literal that prints "SCH" or something similar. The student pays at his lower tax rate. Then the parents can take the AOC or whichever benefit is best. If you're not seeing a diagnostic suggesting it, run the numbers to see which way is most beneficial for the family as a whole.

[Sara EA]

This is a tricky area.  From Pub 970:  "The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules dis-cussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for non-qualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expen-ses can't exceed the amount of the student's actual non-qualified expenses that are paid in the tax year."

I have never been able to find the terms of a particular scholarship that might show it can be used for nontuition purposes.  (I've actually looked on college websites.)  I suspect most can't be.  So you can't just say ok, the student got a scholarship but I'll make it taxable so the parents get a bigger credit.  The scholarship must meet the conditions above.

[Lion EA]

Some scholarships say they can be used for tuition only. Some do not. Some say they can be used for tuition &/or room & board. Some colleges disburse the excess over college costs to the students. Some return the excess to the organization that issued the scholarships, based on the requirements of the scholarships. One local HS gives out scholarships to a few graduating seniors each year that are supposed to be used for books. Yes, you have to ask your clients questions.