Education Expenses - Scholarships

[Yardley CPA]

Hoping someone with a bit more experience dealing with education costs can chime in and provide some guidance.  I have a MFJ client with two children in college.  I completed all the necessary forms on ATX.  Here is what both students Scholarship Worksheets look like:

The note on ATX indicates it may be beneficial to choose to include otherwise tax-free scholarships in income.  Where exactly does one include the amount in income?  After including an amount in income do you decrease line 7A on the scholarship tab by that same amount?  I would appreciate any input you can offer on this. 

 

 

[Lynn EA USTCP in Louisiana]

the choice to include scholarship in income is done on the student's tax return, not the parents.  click on the arrow on the wages line and a worksheet should come up.  input the $ amount on the scholarship line.  when you close that tab "SCH" should show on that line next to the $ amount.  And yes, the scholarship amount (on the parent's return) is reduced by the amount included in income on the studen'ts tax return.

 

 

[HV Ken]

4 hours ago, Lynn EA USTCP in Louisiana said:

the choice to include scholarship in income is done on the student's tax return, not the parents.  click on the arrow on the wages line and a worksheet should come up.  input the $ amount on the scholarship line.  when you close that tab "SCH" should show on that line next to the $ amount.  And yes, the scholarship amount (on the parent's return) is reduced by the amount included in income on the studen'ts tax return.

 

 

You need to see if your state also honors this approach. NY does not!

[TexTaxToo]

And this "shifting" is only allowed if the terms of the scholarship or grant allow it.  Scholarships that are restricted to paying only tuition and other qualified expenses cannot be shifted to income.  (Pell grants are unrestricted - many scholarships are not).

Even though the income goes on line 1, it is considered unearned for most purposes and could result in the student being subject to the kiddie tax.  But for purposes of the filing requirement, the scholarship is considered earned income, and if the student's income is less that the filing requirement, you needn't report it at all.