529 Withdrawal vs Taxable Scholarship

Forum|Forum|5 years ago
February 7, 2021
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My daughter received scholarships in 2020 and we also withdrew money from my daughter's 529. I have two related questions:

- Although the scholarships can be considered non-taxable, is it allowed for our daughter to enter them as taxable on her return and pay taxes on that amount, and have us therefore reduce the amount of nontaxable scholarship income by the same amount? This would reduce the overall amount of taxes we would have to pay on the 529 earned income. Would we do this by going to the Student Info Worksheet and entering it into Part V, Item 4 (amount required to be used for other than qualified education expenses)?

- Some of her scholarships are required to be used for tuition, while one is allowed to be used for anything. Does that make a difference (i.e., would we only be allowed to do this on the one scholarship that can be used for anything)?

Anonymous

How much did you pay for tuition?

How much did you take out of your 529?

How much was the scholarship (what did she spend it on)?

Did you get a 1098-T? What numbers were in the boxes?

CMS7Author

Tuition and fees totaled $51,612; books and other expenses $191; room and board $9412

We took out $50,164

Scholarships included $25,000 with no restrictions and $11,050 restricted to tuition/etc. There was also employer-provided assistance. Per the rules, $5250 of that was considered nontaxable and the rest was already included in her W-2.

All the scholarships went directly to the school, so it was spent to fully cover the tuition and costs, including room and board. She actually got some money back from the unrestricted scholarship.

We did not receive a 1098-T from the school. Apparently the rules say that the school is not required to submit a 1098-T if the full cost of attendance is covered (which seems weird to me, but I looked it up).

Thanks!

KrisD15

Yes, that makes a difference.

The IRS does allow Taxpayers to allocate expenses to receive the best tax break, but restricted scholarships must be used for what they were intended. In your case towards tuition.

51803 (51612 + 191) expense less 16300 (11050 + 5250)leaves 35503 tuition/fees expense.

50164 Distribution less remaining tuition leaves 14,661 less room and board (9412) leaves 5,249 for you to claim. In your situation, there seems to be no wiggle room for the student to claim any additional scholarships.

Are you including all additional costs? Did the student need to purchase a laptop? Did you include meal expense?

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