Taxable scholarship?

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

Reply to
Frank S. Duke, Jr.
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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

Reply to
Harlan Lunsford

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.

Reply to
Alan

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

Reply to
brownwp

in article snipped-for-privacy@w9g2000yqa.googlegroups.com, snipped-for-privacy@longwood.edu at snipped-for-privacy@longwood.edu wrote on 3/12/09 6:39 PM:

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

Reply to
Frank S. Duke, Jr.

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.

Reply to
Phil Marti

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