Athletic Scholarship

[Dave T]

New client emails me her tax docs. a couple of small W-2's and a 1098T from a major Texas university.  She is on a running scholarship and the 1098 shows 26K in box 1 and 34K in box 5 Scholarships. 

I call her to get more info and she says the difference is for off campus housing versus room and board on campus as well as for books.  She says she has had this situation in prior years and preparer didn't include anything as income. 

Seems to me, and as I read Pub 970, that this excess, apart from the books, she has about 8K of additional income and no Education Credits. Am I correct in this?

As an aside, she said she just got picked up by one of the major shoe brands which will take effect in 2024. 

Thanks in advance for your help

 

Dave T

 

[Lion EA]

Yep, some income to report. But, hey, she's getting a free college education, including R&B, for just her tax rate X about 8K. Pretty good deal. And, it set her up for a major shoe brand deal...

IF she still qualifies as a dependent, she can take in an extra $4K income so her parents -- if they're at a higher tax bracket -- can take AOL. Or, if she's NOT any one else's dependent but still in a low tax bracket this year, she can maximize scholarship vs AOL. This all assumes her scholarship can be used for other than tuition & fees, but you say it can be used for board/housing.

https://www.journalofaccountancy.com/issues/2019/mar/education-tax-credits.html

https://www.cpapracticeadvisor.com/2017/08/15/four-tips-for-maximizing-your-clients-education-benefits/26651/

[WITAXLADY]

oh my goodness! This always comes up on the warnings - "check into making the scholarship taxable" and I have always wondered about it - but never took the time. 

Thank you for the info!!

D/WI

[Randall]

There never seems to be any scholarship documentation as to what the scholarship money is allowed for.  I have thought in the past if the scholarship allows to cover other things such as room and board and other living expenses, then it wasn't income.  But the scholarship document must say so.  Is there documentation about various scholarships?

[TexTaxToo]

Scholarships and grants are only excluded from income if used for qualified expenses (e.g., tuition, fees, books, etc.).  If used for living expenses, they are taxable.  Many scholarships are restricted and can only be used for qualified expenses - there is no option to shift them to living expenses (which would allow some of the qualified expenses to be used for AOC or LLC).

Pell grants are unrestricted.  You can treat them as being used for living expenses (even if they were actually sent directly to the school and used for qualified expenses - money is fungible).  That part then becomes taxable to the student, but any qualified expenses that are now treated as being paid by other funds can be used for AOC or LLC, which often more than offsets the tax.

For other scholarships and grants, there should be documentation saying they are unrestricted or can be used for living expenses.  A good hint is seeing box 5 greater than box 1.

[Margaret CPA in OH]

Many, if not most, 529 plans also allow for those other expenses.