Module 8C: TREATMENT OF SCHOLARSHIPS AND GRANTSSpecial thanks to: Tricia Ragland, Gwen Moore, and Janet Herrgesell with Foundation Communities, Austin, Texas for their contribution to the content contained in this module.

▪Understand how to determine if the taxpayer has taxable scholarship/grant income

▪Understand when to treat scholarships or grants as income

▪Understand when to complete Form 8615 (Kiddie Tax)

By the end of this module you will…

▪ Treating Scholarships and Grants as Income

▪Kiddie Tax

▪Re-Cap

▪Knowledge Check

In this module…

▪ If all or part of scholarships and grants were used toward living expenses the amount is reported as taxable income on the student’s return

▪The remaining total of education expenses paid to be available for tax credits isreported on the return where the student is claimed.

▪Students can choose how they want to allocate grant or scholarship money:▪ Living Expenses, or

▪ Qualified Education Expenses

Treating Grants and Scholarships as Income

Determining Scholarship or Grant Income

The amount of scholarships and grants that exceed

expenses is reported on the student’s return as income.

Scholarship or Grant Income = $9,950 - $5,000 = $4,950

▪ If a scholarship or grant allows the student to use the money for qualified expenses or living expenses (unrestricted), they have the option to trade in the tax-free status of scholarships to take advantage of the sometimes more lucrative education credit.

▪ When electing to take this option, you can make an additional amount of qualified expenses useable for education credits, but you must also make the same amount of scholarships taxable to the student.

Options for maximizing education credits

▪ In the previous example, we determined that there were $5,000 taxable scholarships, however in this example there were $0 available for education credits.

▪ If the scholarships or grants were unrestricted then the taxpayer has the option to use up to $4,000 for the American Opportunity Credit, but when we do that, we need to increase the taxable amount by $4,000, making the new taxable amount $9,000

Maximizing Education Credits

▪This option should only be considered when:▪ It has been verified that the grant or scholarship can be used for living

expenses.

▪The available qualified expenses are below:

▪$4,000 for American Opportunity Credit

▪$10,000 for Lifetime Learning Credit.

▪Be alert that by adding taxable income can affect▪Earned income credit and other credit amounts

▪State refund amounts or amounts owed

▪Looking to maximize credits can increase refunds by over $1000.

Using This Option

▪ Many dependents have little to no taxable income, so moving income to their return can be very beneficial to taxpayers claiming dependent students.

▪ Whenever possible the best option is to have the parent(s) and student come in together to get their returns prepared.

▪ This may cause a filing requirement and the dependent to owe, but usually does not outweigh the benefits to parents.

Maximizing credits for dependents

Adding scholarship income to a dependent’s return may increase the dependent’s income enough to create a filing requirement or the dependent may already be required to file.

▪ If a dependent is required to file (see Pub 4012, Tab A)

AND

▪The taxable scholarship income exceeds $2,200, then include Form 8615 on the dependent’s return.

▪Form 8615 calculates a different tax rate for a dependent’s scholarship income--it does not always mean that dependents will have tax liability.

Kiddie Tax and Form 8615

Beginning with tax year 2018, Form 8615 is in scope for VITA.

Re-Cap

▪ Taxpayer must have a Form 1098-T and copy of Student Account Statement to claim an education credit.

▪ Taxable scholarship/grant income is reported on the student’s return when the amount exceeds qualifying education expenses.

▪ Tax credits are reported on the tax return of the taxpayer who can claim the student as a dependent. The student claims the credit if no taxpayer claims him as a dependent.

▪American Opportunity Credit

▪ Lifetime Learning Credit

▪ In some cases, you can report scholarships as income taxable to the student to maximize education credits.

Re-Cap

Up Next…Module 9: Affordable Care Act

Knowledge Check

▪ Module 8 Quiz

▪ Dear IRIS letters