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June 6, 2019
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Confusion over scholarship taxes?

  • June 6, 2019
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I am a graduating college student that has little to no idea of what’s going on in regards to taxes. Pardon the ignorance, but i was not aware we had to pay taxes on scholarships that’s left over after costs likes tuition and the such. I was always under the impression that since the rest of the money went to university apartment rent, at least in my case, it wouldn’t be considered as income. That being said, I attended UCLA from 2015-2017. And i didn’t list the leftover scholarship money when I did my taxes in 2016/2017. I did work, and i did file out the taxes from the income i earned from my jobs, but never the scholarships. We, my mother and I, would just go to our tax person and we would give them our tax forms from our jobs, and that was the end of it. I wasn’t aware of this.  So really there’s 4 questions that need to be answered for me.

I read that scholarship taxes are only taxes at the state level, as in not for social security or medical, is this true? 


If not, and either way, on my 1089t it says about 4500 is taxable for one given year, so how much would I expect to pay from that if it’s the same for two years?

I’ve been listed as a dependent for my mom up until last year, will this affect her? 


Am I in deep trouble?


Also, side note while I was looking around for information, but a cnn article said that the IRS doesn’t really penalize for not reporting scholarships? Is this also true?

    Best answer by Opus 17

    Everything is described here. https://www.irs.gov/forms-pubs/about-publication-970

    Scholarship money that is not spent for qualified education expenses is taxable income.  Qualified expenses are tuition and certain required fees and other required costs.  Room and board is not a qualified education expense even if you live on campus.  (Everyone has some kind of cost for food and housing and it's never deductible, just because you are a college student doesn't make your food and housing more deductible than mine.)

    This is taxable income but it is not "earned income" so it is not subject to social security and medicare tax, just state and federal income tax.

    This should all be reported on your 1098-T.  If you have a full scholarship, you don't pay for tuition so you aren't eligible for tuition-based credits or deductions.  Then the excess will automatically be added back to your taxable income if you entered the 1098-T and fully completed the interview in Turbotax.

    It is somewhat surprising that the IRS has not already billed you, at least for the 2015 tax year (filed in spring of 2016), they usually can match up 1098-Ts to tax returns by computer and send automatic letters when there is a mis-match.

    If you file an amended return to report the income and pay tax, the IRS can assess a late payment penalty of 0.5% per month of the amount that was paid late (counting back to April 15, 2016 for the 2015 tax year, or counting to April 15, 2017 for the 2016 tax return) plus statutory interest on the unpaid amount (tax plus penalty) at a variable rate that is currently about 4% per year.  If the IRS audits you and catches you, and decides the error was willful tax avoidance, they can assess an additional 25% penalty.  

    You would not pay the penalty and interest when you filed the amended return, wait for the IRS bill you for the exact amount.  And, there is a form to request an abatement of the penalty if this is your first time owing a penalty (but the interest can't be waived).  

    If you don't amend to fix your returns, the statute of limitations for the IRS to catch you and bill you is 3 years from the original due date or the filing date, whichever is later; or 7 years if the error results in an underpayment of tax owed by more than 25%.  

    The amount of tax you actually owe could be from 0-28% of the excess scholarship, depending on your other income, but 10% or 15% is most likely.  Plus penalties and interest.  And probably 3-5% for your state income tax.

    You owing tax and penalties will not affect your parents' tax return even if you are their dependent for the years in question.

    You say you gave your paperwork to your "tax person."  Did you also give them the 1098-T?  If so, they should have included your scholarship as income.  Look at your tax returns; the excess scholarship should be added to your wages on line 7 with the notation "SCH" in the margin.  It might also be on line 21, "Other income."  If you did not give the tax person your 1098-T, go back to them and apologize, give them the forms, and ask them to prepare amended returns for you.

    1 reply

    Opus 17Answer
    Employee
    June 6, 2019

    Everything is described here. https://www.irs.gov/forms-pubs/about-publication-970

    Scholarship money that is not spent for qualified education expenses is taxable income.  Qualified expenses are tuition and certain required fees and other required costs.  Room and board is not a qualified education expense even if you live on campus.  (Everyone has some kind of cost for food and housing and it's never deductible, just because you are a college student doesn't make your food and housing more deductible than mine.)

    This is taxable income but it is not "earned income" so it is not subject to social security and medicare tax, just state and federal income tax.

    This should all be reported on your 1098-T.  If you have a full scholarship, you don't pay for tuition so you aren't eligible for tuition-based credits or deductions.  Then the excess will automatically be added back to your taxable income if you entered the 1098-T and fully completed the interview in Turbotax.

    It is somewhat surprising that the IRS has not already billed you, at least for the 2015 tax year (filed in spring of 2016), they usually can match up 1098-Ts to tax returns by computer and send automatic letters when there is a mis-match.

    If you file an amended return to report the income and pay tax, the IRS can assess a late payment penalty of 0.5% per month of the amount that was paid late (counting back to April 15, 2016 for the 2015 tax year, or counting to April 15, 2017 for the 2016 tax return) plus statutory interest on the unpaid amount (tax plus penalty) at a variable rate that is currently about 4% per year.  If the IRS audits you and catches you, and decides the error was willful tax avoidance, they can assess an additional 25% penalty.  

    You would not pay the penalty and interest when you filed the amended return, wait for the IRS bill you for the exact amount.  And, there is a form to request an abatement of the penalty if this is your first time owing a penalty (but the interest can't be waived).  

    If you don't amend to fix your returns, the statute of limitations for the IRS to catch you and bill you is 3 years from the original due date or the filing date, whichever is later; or 7 years if the error results in an underpayment of tax owed by more than 25%.  

    The amount of tax you actually owe could be from 0-28% of the excess scholarship, depending on your other income, but 10% or 15% is most likely.  Plus penalties and interest.  And probably 3-5% for your state income tax.

    You owing tax and penalties will not affect your parents' tax return even if you are their dependent for the years in question.

    You say you gave your paperwork to your "tax person."  Did you also give them the 1098-T?  If so, they should have included your scholarship as income.  Look at your tax returns; the excess scholarship should be added to your wages on line 7 with the notation "SCH" in the margin.  It might also be on line 21, "Other income."  If you did not give the tax person your 1098-T, go back to them and apologize, give them the forms, and ask them to prepare amended returns for you.

    June 6, 2019
    My tax person never asked for my 1098-T.  I only became aware of it after looking around in my finance links for my school account. That being said, for that taxable amount, if I’m understanding correctly, I’d only pay 450$~ in taxes for that given year, correct? Not including the penalties.