Taxable scholarship?


F

Frank S. Duke, Jr.

My client is a 50 year old high school teacher who took two courses in 2008
for college credit, one at University of Cincinnati and one at Miami of
Ohio. He received a1098-T from each college showing the cost of the
tuition and reflecting a scholarship in box 5 for an equal amount so the
courses were ³free². IRS Pub 590 indicates that they are tax free only if
you are a candidate for a degree and you use the money to pay for qualified
educational expenses. He was not enrolled as a degree candidate, just
taking professional enrichment education.

Being enrolled as a degree candidate seems to be a clear requirement. The
total amount is $6630 in income so it makes a significant difference.
Section 117 was not much because it does not define "degree candidate". Any
insights you can add?

§ 117. Qualified scholarships
(a) General rule
Gross income does not include any amount received as a qualified scholarship
by an individual who is a candidate for a degree at an educational
organization described in section 170 (b)(1)(A)(ii).
(b) Qualified scholarship
For purposes of this section‹
(1) In general
The term ³qualified scholarship² means any amount received by an individual
as a scholarship or fellowship grant to the extent the individual
establishes that, in accordance with the conditions of the grant, such
amount was used for qualified tuition and related expenses.
Uncompensated advice guaranteed correct or double your money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA
 
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H

Harlan Lunsford

Frank said:
My client is a 50 year old high school teacher who took two courses in 2008
for college credit, one at University of Cincinnati and one at Miami of
Ohio. He received a1098-T from each college showing the cost of the
tuition and reflecting a scholarship in box 5 for an equal amount so the
courses were ³free². IRS Pub 590 indicates that they are tax free only if
you are a candidate for a degree and you use the money to pay for qualified
educational expenses. He was not enrolled as a degree candidate, just
taking professional enrichment education.

Being enrolled as a degree candidate seems to be a clear requirement. The
total amount is $6630 in income so it makes a significant difference.
Section 117 was not much because it does not define "degree candidate". Any
insights you can add?

§ 117. Qualified scholarships
(a) General rule
Gross income does not include any amount received as a qualified scholarship
by an individual who is a candidate for a degree at an educational
organization described in section 170 (b)(1)(A)(ii).
(b) Qualified scholarship
For purposes of this section‹
(1) In general
The term ³qualified scholarship² means any amount received by an individual
as a scholarship or fellowship grant to the extent the individual
establishes that, in accordance with the conditions of the grant, such
amount was used for qualified tuition and related expenses.
Uncompensated advice guaranteed correct or double your money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA
Is perhaps the teacher itemizing deductions already and perhaps these
courses fit the criteria of appropriate and helpful in the classroom?

ChEAr$,
Harlan Lunsford, EA n LA
 
A

Alan

Frank said:
My client is a 50 year old high school teacher who took two courses in 2008
for college credit, one at University of Cincinnati and one at Miami of
Ohio. He received a1098-T from each college showing the cost of the
tuition and reflecting a scholarship in box 5 for an equal amount so the
courses were ³free². IRS Pub 590 indicates that they are tax free only if
you are a candidate for a degree and you use the money to pay for qualified
educational expenses. He was not enrolled as a degree candidate, just
taking professional enrichment education.

Being enrolled as a degree candidate seems to be a clear requirement. The
total amount is $6630 in income so it makes a significant difference.
Section 117 was not much because it does not define "degree candidate". Any
insights you can add?

§ 117. Qualified scholarships
(a) General rule
Gross income does not include any amount received as a qualified scholarship
by an individual who is a candidate for a degree at an educational
organization described in section 170 (b)(1)(A)(ii).
(b) Qualified scholarship
For purposes of this section‹
(1) In general
The term ³qualified scholarship² means any amount received by an individual
as a scholarship or fellowship grant to the extent the individual
establishes that, in accordance with the conditions of the grant, such
amount was used for qualified tuition and related expenses.
Uncompensated advice guaranteed correct or double your money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA
First off, I don't know what you mean when you say he took the
two classes "for college credit." If he is not enrolled in any
school as a degree candidate what's being credited? I'll assume
he took the two classes and obtained a passing grade (credit) and
received the tuition reimbursement or direct payment as a
scholarship for satisfactory completion. You are correct that any
tuition reimbursement or payment on his behalf is a taxable
scholarship and must be reported on Line 7 of the 1040 as
scholarship income.

Depending on his income and whether or not he itemizes
deductions, he can either take the tuition and fees deduction or
the work-related education deduction or the lifetime learning
credit (LLC). The LLC would provide the biggest bang for the buck
if he is eligible. In fact, if he is in the 15% tax bracket, he
will come out ahead.
 
B

brownwp

Being enrolled as a degree candidate seems to be a clear requirement.  The
total amount is $6630 in income so it makes a significant difference.
Section 117 was not much because it does not define "degree candidate".  Any
insights you can add?
Being a degree candidate is a requirement for scholarship treatment.

Where did the $6,630 come from? That is, who paid the tuition?

Regards,
Bill
 
F

Frank S. Duke, Jr.

Being a degree candidate is a requirement for scholarship treatment.

Where did the $6,630 come from? That is, who paid the tuition?

Regards,
Bill
Teachers are required to take courses relevant to their area of expertise to
maintain their accreditation, just like CPAs and Enrolled Agents. Usually
they take courses at colleges in the summer. Once one has achieved a
masters degree, they go for "Masters + 30" which is another pay level.
Universities offer courses targeted at these customers. In the case of the
Univ. of Cincinnati, the course was the Summer 2008 Physical Science by
Inquiry program for Teachers in Grades K-5. The course was sponsored by the
Ohio Center for Excellence in Science and Mathematics Educations and the
Cincinnati Public Schools. The only thing he actually had to pay was an $85
registration fee which was returned on the successful completion of the
course. He received 6 graduate credits in physics. The Miami of OH course
was similar, sponsored by the Southwest Ohio Science institute.

I don't see how he was eligible for any credits or deductions because he did
not pay anything. Box 1 and box 5 of the 1098-T have the same number in
them. If he is considered a "degree candidate" the scholarship is clearly
tax free. If not, it is added to line 7 of the form 1040.

What I am unable to find is any clear definition of the criteria for being a
"degree candidate". The closest I have come is Treasury Reg. 1.117-3
Definitions which say, "The term "candidate for a degree" means an
individual, whether undergraduate or a graduate, who is pursuing studies or
conducting research to meet the requirements for an academic or professional
degree conferred by colleges and universities. It is not essential that
such study or research be pursued or conducted at an educational institution
which confers such degrees if the purpose thereof is to meet the
requirements for a degree of a college or university which does confer such
a degrees. A student who receives a scholarship for study at a secondary
school or other educational institution is considered to be a "candidate for
a degree".

This whole thing hinges on whether you check the box on the 1098-T worksheet
that says not a "degree candidate". If you do, the scholarship goes
straight to line 7 of the form 1040. The above definition would seem to
require a measure of future intent. Even if you were pursuing a degree,
what happens if you drop out? Does your scholarship become taxable. If
this is taxable, it costs him about $1300 in federal and state tax.

Uncompensated advice guaranteed correct or double your money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA
 
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P

Phil Marti

Frank S. Duke said:
I don't see how he was eligible for any credits or deductions because he
did
not pay anything.
If the expenses were paid with a taxable scholarship they can be used as the
basis for the LLC, just the same as taxable employer benefits.
 
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