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How to classify repaying a scholarship?

Forum|Forum|5 years ago
October 31, 2020
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I received a scholarship for my education, with the stipulation that I work for the employer that provided the scholarship, otherwise the scholarship would turn into a loan that would need to be repaid.

I received a job offer with another company that makes more financial sense to take and repay this scholarship. My problem is that these funds were reported in box 5 of my 1098-T over the course of three years, so it's my understanding that I paid income taxes on these funds, which should not be the case for a loan.

Now that those funds are being retroactively reclassified as a loan, how do I deal with my taxes? Do I have to refile for the years that I received the scholarships and reclassify those amounts as a loan? If so, how do I account for the discrepancy in what is now true and what was listed on my 1098-Ts (do I just... change box 5 to $0 or what)? If not, can I just deduct payments towards that loan off of this year's return?

I'm not quite sure where to start on this one, so any help would be greatly appreciated.

Thanks!

Edit: I should have also mentioned that the amount in box 5 was significantly greater than the amount of box 1 since the scholarship included a hefty stipend, which is why I'm concerned with the income taxes I paid.

Not A Product Question

Best answer by Hal_Al

It sounds like you have a "repayment" situation.

Repayments. This situation is described in IRS Publication 525. If the amount is more than $3000*, you can take a itemized deduction, on line 16 of schedule A (not subject to the old 2% of AGI rule) or you can take a credit. The credit is computed by re-figuring the tax from the previous year as if the income had not been received. Then the difference in tax is claimed as a credit on the current year's return. TT does not do the credit calculation or compare it to the alternate deduction. You have to do that manually. You enter the credit in the forms mode (the forms mode is not available in the on-line versions of TurboTax [TT]). All entries that seem like you should be able to enter on Form 1040 or Schedules 1 through 3 have to be entered on TurboTax's 1040 Worksheet. Scroll way down to Other Credits and Payments Smart Worksheet. Select item D, claim of right under IRC 1341 for repayments. It ends up on line 13 of schedule 3.

So, the taxpayer has the option of either claiming the credit or deducting the repayment as an other itemized deduction, whichever provides the greater benefit. But, you cannot file an amended prior year return.

You can only deduct amounts that were included as taxable income on previous tax returns.

* If the amount is $3,000 or less, no deduction or credit is allowed. In the past, a miscellaneous itemized deduction, subject to the 2% of AGI threshold, was allowed. But, all miscellaneous itemized deduction, subject to the 2% of AGI rule went away in 2018.

macuser_22

Employee

I doubt that the school will reissue 1098-T forms if the money was given to them at the time as a scholarship. The IRS goes by what the school reported. Probably at the time it *was* a scholarship and was taxable as such. I know of no provision in tax law that allows changing a scholarship retroactively. If a loan, then it could not have been reported on a 1098-T in the first place. You side deal with the employer to pay it back would seem to be separate from the original reporting of the scholarship and only between you and the employer.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

M

marsexpressscorpionAuthor

Thanks for your reply!

In this case, the employer is actually the United States Government, and the scholarship is issued directly through government funds (an NSF grant to my University), so it's all the more confusing.

The details of repayment are complicated, but the simple version is that I have 30 days to pay in full directly back to the University. After 30 days, it becomes a debt to the US Treasury with an interest rate set by the current interest rates of a Federal Direct Unsubsidized Stafford Loan.

Do you still think the repayment is separate from the original reporting, even though the entity I made the agreement with was the federal government? If you have any other insight I'd very much appreciate it!

Hal_Al

Employee

I haven't seen your exact situation covered here in this forum. It's usually an employer signing bonus or social security repayment.

That said, it still seems straight forward. In the year(s) you make a repayment, you can claim a deduction or credit; whether it's paid back in a single year or spread out over several years. See rjs's comment: the establishment of the loan may be considered a lump sum repayment.

So, the fact that it's the government or the school doesn't matter. What matters is whether you paid tax on the scholarship income. Unless you had other income, at the time, chances are that not all the scholarship was taxable; so you'll have some calculations to do.

Hal_AlAnswer

Employee

It sounds like you have a "repayment" situation.

Repayments. This situation is described in IRS Publication 525. If the amount is more than $3000*, you can take a itemized deduction, on line 16 of schedule A (not subject to the old 2% of AGI rule) or you can take a credit. The credit is computed by re-figuring the tax from the previous year as if the income had not been received. Then the difference in tax is claimed as a credit on the current year's return. TT does not do the credit calculation or compare it to the alternate deduction. You have to do that manually. You enter the credit in the forms mode (the forms mode is not available in the on-line versions of TurboTax [TT]). All entries that seem like you should be able to enter on Form 1040 or Schedules 1 through 3 have to be entered on TurboTax's 1040 Worksheet. Scroll way down to Other Credits and Payments Smart Worksheet. Select item D, claim of right under IRC 1341 for repayments. It ends up on line 13 of schedule 3.

So, the taxpayer has the option of either claiming the credit or deducting the repayment as an other itemized deduction, whichever provides the greater benefit. But, you cannot file an amended prior year return.

You can only deduct amounts that were included as taxable income on previous tax returns.

* If the amount is $3,000 or less, no deduction or credit is allowed. In the past, a miscellaneous itemized deduction, subject to the 2% of AGI threshold, was allowed. But, all miscellaneous itemized deduction, subject to the 2% of AGI rule went away in 2018.

M

marsexpressscorpionAuthor

Hal_Al, thank you very much for your reply! This sounds like it definitely provides a good starting point for me to look into a bit further, and is exactly what I was looking for.