Login
Financial Independence

Savings rate, FI number, and the path to freedom.

Retirement Strategies

Withdrawal plans, Roth ladders, and early access.

Investing

Index funds, asset allocation, and real estate.

Tax Strategies

Roth conversions, capital gains, and FI tax planning.

Earning More

Career growth, side hustles, and entrepreneurship.

Money Mindset

Beliefs, purpose, and financial psychology.

Health & Fitness

Exercise, nutrition, and mental wellness.

Tax on scholarships!

Tax on scholarships!

LisaB
LisaB 519 XP · · 3 replies

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

Share
Share on Facebook
Share on X
Share on Reddit
Share via Email
Copy link

Replies (3)

fibutworking

fibutworking

8 months ago

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.

kfire

kfire

191 XP

8 months ago

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).

LisaB

LisaB

276 XP

8 months ago

Thank you both for your comments! I hadn't realized that kids had a standard deduction that was that high, fibutworking@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@fibutworking states, the amount above tuition and fees (such as room and board) is taxed now.

Thanks again for the input,

Lisa

Showing 2 of 3 replies

View all replies on Community

Comments

Your comment will be posted after signing in
Join the Conversation

Create an account or sign in to post a comment.

College

College is one of the largest financial decisions families face. This guide explores strategies to reduce or even eliminate student loan debt through scholarships, community college planning, CLEP exams, and more. Learn how to pursue higher education without compromising your financial future.

College Guide
College Hub Page & Content Cluster

Read our complete guide to get up to speed.

From a Recent FI Weekly
“If you’re at Fidelity investing $500/month into a Vanguard mutual fund, you might be losing almost 10% of every contribution before it’s even invested.”

Plus more counterintuitive insights, real stories, and actionable strategies — every Tuesday.

Join 87,000+ people. Free. Unsubscribe anytime.

Track Your Progress to Financial Independence

Get your personalized FI number and track how close you are to reaching your milestones. Most members are closer than they think.

Personalized FI number calculation

Track progress to Coast FI & full FI

Live dashboard updates as you hit milestones

or

100% free — no credit card required

Account created! Redirecting...

Try searching for

⌘K to open anytime

Where Are You on the Path to FI?

1/3

Step 1 of 3

Which of these sounds most like you?

Scan to get the app

Point your phone camera at the QR code