Scholarship Tax?

Question

I have read in the IRS website and in other information that I have recieved that if you have been awarded a scholarship it is taxable if you use it for more than just tuition and fees. I have a scholarship that I was planning on using for some of my room and board. Is the scholarship suject to state taxes? And are there any educational savings accounts/bonds that I could put the extra scholarship money that would allow it to be exempt for federal/state tax? (I will be working this summer so my income will already exceed the standard deduction and personal exemption at the federal level)

Answer 1

Your most important question is able to be answered parallel to whether you should start an educational saving account:

You should weigh starting a business after you get out of school.  If your mind is made up to work for someone else after you graduate, an educational savings account is one option if you plan to get married and feel you will not be able to send your children to college without some sort of "forced savings".

If you provide over 50% of your support, the IRS will allow you to knock 3450 off of your gross income for 2008.  You will also be able to take 5550 if you do not itemize your deductions.  that may be enough to knock your gross income down to zero or nearly zero.

The scholarship money may be used for tuition and fees, room and board, valid lab fees and a few other charges.  If you use any of the money for other things, you will have to add it to income.   The scholarship will be subject to state income tax as state income tax begins with your Federal adjusted gross income {FAGI}.  New Hampshire and Tennessee are the only exceptions {long story}.

All states have standard deduction, itemized deductions and exemptions.  Your state income tax liability will be less than the Federal in your situation.

If both states have income tax, you will most likely have tax withheld by the state that you work in, unless you drive from your home state to work in another state on your summer job.   In the unlikely event that two states withhold tax from you when you work at school, you will be able to get full credit from the state in which the university is not in.  California is the only exception I know of.

Answer 2

The part you use for room and board, or other items other than tuition and fees, is taxable, and you can't put it someplace and avoid the tax.