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Is your childs scholarship taxable?
My child got a scholarship for college. Is it taxable?
In certain situations, yes. If a scholarship is used to pay for college tuition, fees, books, or required
equipment, it's not taxable. But if the scholarship is used to cover room and board, travel costs, or
optional equipment, or if it's awarded as payment for teaching, research, or some other required service, then it is taxable. With most scholarships, the recipient can decide how to apply the money. Your first instinct may be to have your child apply it to tuition, fees, or books (making it tax free). But
be aware that this may impact your ability to claim the Lifetime Learning or the American Opportunity (formerly the Hope) tax credits. That's because these credits are based on the amount of tuition and fees you pay, and any tuition and fees paid with a tax-free scholarship can't be counted when calculating your credit.This rule has the most impact on your ability to claim the Lifetime Learning credit, worth up to $2,000. Why? This credit is calculated as 20% of the first $10,000 of tuition and fees, so a hefty scholarship applied to these expenses may leave you with less than $10,000 in eligible
tuition and fees to count toward the credit. The American Opportunity credit, worth up to $2,500, is calculated differently--100% of the first $2,000 of tuition and fees, plus 25% of the next $2,000 of such expenses. (You can only take one of these credits in a given year for the same student.) If the scholarship has no restrictions on how it can be applied (and assuming you meet the income limits to take the credits--each credit has different income limits), consider running some numbers to determine your best option:(1) apply the scholarship to tuition and enjoy its tax-free status, but reduce the amount of eligible tuition that can be used to calculate the tax credits, or (2) apply the scholarship to room and board and pay income tax on the scholarship, but allow all tuition to be counted when calculating the credits. When running the numbers, keep in mind that generally a tax credit is more valuable than a tax deduction because it reduces your taxes dollar for dollar. For more information, see IRS Publication 970,Tax Benefits for Education.
How will a college scholarship affect my child's 529 plan?
If your son or daughter gets a college scholarship, federal rules governing 529 plans allow you to withdraw from the account an amount equal to your child's scholarship. You won't owe the 10%
penalty that typically applies to the earnings portion of any withdrawal not used to pay the beneficiary's qualified education expenses. However, you'll still owe income tax on the earnings portion of the withdrawal. If you want to make a scholarship-related withdrawal from your 529 account, you must provide written notice to the plan manager, along with proof of your child's scholarship. But withdrawing money from your 529 account isn't your only option. Another course of action is to simply leave the money in the account for your child's future use--most 529 plans allow funds to be used for graduate school. Or, you can change the beneficiary of the account to another child or qualified family member with no income tax or penalty implications. Either way, the full sum can be left to grow tax deferred in the account, and you'll enjoy the convenience of keeping the same plan. If, though, you're unhappy with your current plan (e.g., high fees, limited investment options, poor customer service), then this may be the perfect time to roll over your funds to a different 529 plan. Under federal rules, you're entitled to roll over the funds in your 529 plan once per calendar year to a different 529 plan. You can keep the same beneficiary or name a new one. In the latter case, as long as the new beneficiary is a qualified family member, no income taxes or penalty will be due. Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should
be read carefully before investing. Also, before investing, consider whether your state offers a529 plan that provides residents with favorable state tax benefits.
Louis Fevrin Financial Advisor/Managing Partner
lfevrin@iacadvisor.com
http://www.iaamllc.com/section1.cfm
Vision Planning Group LLC
40 State Route 36 Suite 3
West Long Branch, NJ 07764
732-923-1331 ext.108
973-930-8166 cell
In certain situations, yes. If a scholarship is used to pay for college tuition, fees, books, or required
equipment, it's not taxable. But if the scholarship is used to cover room and board, travel costs, or
optional equipment, or if it's awarded as payment for teaching, research, or some other required service, then it is taxable. With most scholarships, the recipient can decide how to apply the money. Your first instinct may be to have your child apply it to tuition, fees, or books (making it tax free). But
be aware that this may impact your ability to claim the Lifetime Learning or the American Opportunity (formerly the Hope) tax credits. That's because these credits are based on the amount of tuition and fees you pay, and any tuition and fees paid with a tax-free scholarship can't be counted when calculating your credit.This rule has the most impact on your ability to claim the Lifetime Learning credit, worth up to $2,000. Why? This credit is calculated as 20% of the first $10,000 of tuition and fees, so a hefty scholarship applied to these expenses may leave you with less than $10,000 in eligible
tuition and fees to count toward the credit. The American Opportunity credit, worth up to $2,500, is calculated differently--100% of the first $2,000 of tuition and fees, plus 25% of the next $2,000 of such expenses. (You can only take one of these credits in a given year for the same student.) If the scholarship has no restrictions on how it can be applied (and assuming you meet the income limits to take the credits--each credit has different income limits), consider running some numbers to determine your best option:(1) apply the scholarship to tuition and enjoy its tax-free status, but reduce the amount of eligible tuition that can be used to calculate the tax credits, or (2) apply the scholarship to room and board and pay income tax on the scholarship, but allow all tuition to be counted when calculating the credits. When running the numbers, keep in mind that generally a tax credit is more valuable than a tax deduction because it reduces your taxes dollar for dollar. For more information, see IRS Publication 970,Tax Benefits for Education.
How will a college scholarship affect my child's 529 plan?
If your son or daughter gets a college scholarship, federal rules governing 529 plans allow you to withdraw from the account an amount equal to your child's scholarship. You won't owe the 10%
penalty that typically applies to the earnings portion of any withdrawal not used to pay the beneficiary's qualified education expenses. However, you'll still owe income tax on the earnings portion of the withdrawal. If you want to make a scholarship-related withdrawal from your 529 account, you must provide written notice to the plan manager, along with proof of your child's scholarship. But withdrawing money from your 529 account isn't your only option. Another course of action is to simply leave the money in the account for your child's future use--most 529 plans allow funds to be used for graduate school. Or, you can change the beneficiary of the account to another child or qualified family member with no income tax or penalty implications. Either way, the full sum can be left to grow tax deferred in the account, and you'll enjoy the convenience of keeping the same plan. If, though, you're unhappy with your current plan (e.g., high fees, limited investment options, poor customer service), then this may be the perfect time to roll over your funds to a different 529 plan. Under federal rules, you're entitled to roll over the funds in your 529 plan once per calendar year to a different 529 plan. You can keep the same beneficiary or name a new one. In the latter case, as long as the new beneficiary is a qualified family member, no income taxes or penalty will be due. Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should
be read carefully before investing. Also, before investing, consider whether your state offers a529 plan that provides residents with favorable state tax benefits.
Louis Fevrin Financial Advisor/Managing Partner
lfevrin@iacadvisor.com
http://www.iaamllc.com/section1.cfm
Vision Planning Group LLC
40 State Route 36 Suite 3
West Long Branch, NJ 07764
732-923-1331 ext.108
973-930-8166 cell
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