Taxes and scholarship amounts not used for qualified tuition expenses

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Topic Author
Infomom2
Posts: 278
Joined: Sun Feb 14, 2016 2:25 pm

Taxes and scholarship amounts not used for qualified tuition expenses

Post by Infomom2 »

So, I am late to the game in realizing that scholarships/grants in excess of qualified tuition and related expenses are taxable.I am embarrassed, but here I am.The 1098 T was in my daughter's financial aid account, but is not mailed, and I didnt happen to see it her first year 2021
My daughter was 18 in 2021 and 19 in 2022. She is a dependent and lives with me.

-In 2021, she received about $917 in scholarships/grants (on her 1098T) that were in excess of qualified expenses. This was her only income (no job) and she did not file in 2021. Does she have to file now and report this or is it okay because it's below the threshold of unearned income?
-For 2022, the 1098t shows she received about $4800 in scholarships in excess of qualified expenses. About $2160 of the $4800 in grants was Covid relief/hardship grant money that she applied for; I thought I had read when she applied that it was not taxable, but it appears on her 1098T in box 5 She also earned about $2100 from a job outside of school (not work study). I am assuming she will need to file 2022 taxes or is it okay not to because for the purposes of standard deductions the scholarship money is considered earned income, and she is well below the allowed standard deduction? I am confused about when the scholarship/grant money is considered unearned vs earned income. I read it is mostly unearned, but somehow counts against standard deduction as earned (I think), so I am confused. Any knowledge on where I can confirm if the Covid grant/hardship money needs to be included/will be taxable if she does need to file and be taxed? I know I can call the school, but am anticipating they may tell me they can't help with tax questions. Thanks so much for any help!
Katietsu
Posts: 7662
Joined: Sun Sep 22, 2013 1:48 am

Re: Taxes and scholarship amounts not used for qualified tuition expenses

Post by Katietsu »

Remember that money spent on books, supplies, fees and equipment required for her courses are qualified expenses. Usually there are therefore some qualified expenses that are not reflected on the 1098-T.

The taxable scholarship is considered earned income for some purposes and unearned income for others. You are right that for the purpose of determining the standard deduction for a dependent, it is earned income. It appears that she should owe no federal taxes. If she had withholding, she could be due a refund. She could owe state taxes.

You are right that there was a provision that excluded from taxable income emergency financial aid grants for unexpected expenses related to the COVID-19 pandemic, as well as expenses related to the pandemic-related disruption of campus operations. These were not supposed to be reported in Box 5. My nephew and nieces all had these in 2020 or 2021. Though their schools handled them differently, none reported in Box 5. I think you will need to figure out how this 2022 amount is properly classified.
secondcor521
Posts: 1597
Joined: Wed Sep 10, 2014 4:11 pm

Re: Taxes and scholarship amounts not used for qualified tuition expenses

Post by secondcor521 »

Taxable scholarships and grants are sometimes considered earned income and sometimes considered unearned income, depending on the tax context.

Whether a scholarship is taxable or not can be determined by looking at the language in IRS Pub 970 Chapter 1. Be aware that you can't just compare the expenses on Form 1098-T with the scholarships listed in box 5 because there can be (and often are) other expenses which are qualified educational expenses. IRS Pub 970: https://www.irs.gov/pub/irs-pdf/p970.pdf.

Go find a copy of the Form 1040 instructions for 2021 and look at the section on who must file. In particular, look at Chart B (for dependents) and Chart C (other situations where she must file). For determination of a filing requirement, taxable scholarships are considered earned income. It is likely, but not guaranteed, that she doesn't have a federal filing requirement for 2021. This also generally means that she doesn't have a state income tax filing requirement, but I would suggest checking your/her state tax rules in that regard also.

For the COVID money, that might be HEERF funds or similar, and those should not have been included in box 5, although some schools did include it there. I would suggest asking the school if those funds were HEERF funds and the amount; if they were, you should be able to exclude those from the calculations of her taxable scholarships. The school should be able to tell you if the funds were HEERF funds and the exact amount. Other than HEERF funds or similar, if she received any other scholarship or grant money, those are likely taxable. For more details, see https://www.irs.gov/newsroom/higher-edu ... -questions.

Regarding your questions about her filing a 2022 return, the answer is the same as above - find a copy of the 2022 Form 1040 instructions and see if any of the Chart B or Chart C items apply to her. Do note that the standard deduction for dependents is a calculated number based on their income and is not the "standard" $12,950 for single filers in 2022.

Even if she doesn't have to file a 2022 return, she may want to file one in order to get back any federal withholding from her job (and possibly claim the AOTC, although whether and who should claim AOTC and when is a bit more complex topic).
Topic Author
Infomom2
Posts: 278
Joined: Sun Feb 14, 2016 2:25 pm

Re: Taxes and scholarship amounts not used for qualified tuition expenses

Post by Infomom2 »

Thanks for the replies. I am absorbing them and figuring things out. It looks like she is below the amount that requires her to file a federal form. I will look into this further, but as long as the scholarship is considered earned income *for the purposes of determine if she needs to file *(as if it were unearned for that purpose she would be above the amount needed to file).
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