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Is scholarship money sometimes taxable?


Dear Tax Talk,
I have two children attending separate universities and need advice on how I should treat their scholarships for tax purposes. Fortunately, both children received an abundance for their education.

My son received the presidential scholarship, which covers tuition, fees, books, room and board and living expenses, as well as Missouri's Bright Flight and several private scholarships. This gave him about $5,000 extra his freshman year of college.

My daughter received the president's scholarship at the university she attends, which covers tuition. She received additional private scholarships that help to cover all of the rest of her living expenses.

I have questioned three local CPAs about how I should treat these funds and what, if anything, is taxable. I have been told by all three that nothing is reportable for tax purposes. What I have read tells only tuition, books, fees and required purchases related to their field of study are tax-free. Anything received for room and board or additional living expenses is taxable.

Where is the conflict in this? Most of the tax-related information I have read concerning college students refers to the credits and deductions for expenses incurred. I need help on what parents should do when their child gets everything covered. We've never received any tax documents from either university or the private scholarship funds. I have contacted both financial aid offices and no one there can offer any advice. I contacted the Internal Revenue Service several times and each person I spoke to had a different version. Help! I'm totally confused. Thank you. -- Deanna

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Dear Deanna,
If three CPAs tell you there's nothing to report, why wouldn't you believe them? If what you've read is about credits, then you read the wrong publication. Scholarships and fellowships are discussed in IRS Publication 520.

As you suspect, the amount of scholarships and grants provided for your children's education that exceeds their tuition, fees, books and required (not suggested) equipment is taxable income. The truth is though that this rarely ever gets reported by the scholarship grantor and that's probably why the CPAs said it's not taxable.

Starting in 2003, the amounts should be reported on Form 1098-T. The IRS just finalized the regulations relating to the requirements by educational institutions in completing these forms and 2003 is the first year that penalties may be imposed for failure to report these amounts.

However, the educational institution will only report amounts that it administers. If your child received a direct payment of scholarship funds, it is up to that payer to report the scholarship. Whether or not you receive a 1098-T, the taxable portion of the scholarship should be reported on the wages line of your child's Form 1040. According to Publication 520, you should write "SCH" next to the wage line.

-- Posted: Mar. 2, 2004




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