Tax on scholarships!
Hello, fellow college hackers,
My son (a sophomore at a state school) got a ton of merit Aid his first year of college – $30,000 K – which is great… But we just got the 1098T to file with his taxes and it seems we he owes federal and state taxes on half of the amount (which was not used for tuition and fees).
From googling I found that this income is “hybrid “and doesn’t count as earned income, but there is tax due on it after his deduction, which is only $2280- he is then taxed at my tax rate (the kiddie tax). I’m trying to think of ways to decrease his tax burden, but because it doesn’t count as ‘earned income’ he can’t contribute to a traditional IRA to lower his tax burden. I did hear about a cool state tax break whereby he could contribute up to $2500 to his own 529 plan – our state offers a $2500 tax credit for that amount every year. He’s then eligible to withdraw up to his scholarships amounts so he could take that money back out penalty free. But please let me know if anyone has thought about how to manage the federal taxes.
Thanks!
Lisa
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I just finished TurboTax filing for my daughter for scholarships in excess of qualified higher ed expenses. For this, the student must file a tax return and cannot be handled on the parents return. Note that qualified expenses do not include room and board or supplies or a laptop or many other things. That being said, the student does have a standard deduction (it was $9xxx--I forget the exact amount) and in the end she owed $140 on the federal return. Our state does not tax scholarships so tax due was 0 and no return was needed for state.
Wow, congratulations on an awesome kid, first of all!
When I was in college (10-15 years ago, I received more in scholarships than my tuition, and was allowed to put that towards living expenses, etc. I was not taxed on the amount. I also qualified for federal work study. Not sure if the tax laws have changed. However, my 529 plan was not used, and that money was rolled into my sister's and cousins' 529s (set up by grandparents).
Thank you both for your comments! I hadn't realized that kids had a standard deduction that was that high,
fibutworking - I read it was around $2,800. And maybe things have changed with the tax laws in the past few years (this is the first year I would he will be paying tax on his scholarships) but apparently, as 
fibutworking states, the amount above tuition and fees (such as room and board) is taxed now.
Thanks again for the input,
Lisa