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
