One big benefit of scholarships is that they are tax free! Academic scholarships or fellowships that are used for qualified tuition, fees and books are generally not taxable. For a scholarship or fellowship to be non-taxable, you must meet the following conditions:
If you are over the income limits that trigger a phase-out for any tax break, you may be able to change your modified adjusted gross income just enough to qualify for a full credit or a larger partial credit. The key is to boost your "above the line" contributions. If you look at your 1040 tax return, you'll notice that your adjusted gross income is on line 37. Anything that appears on lines 23 through 36 are known as "above the line" deductions, which will reduce your AGI. For most people, the one item over which they have the most control is their contribution to IRAs, including SEP and SIMPLE IRAs. Also, contributions to 401k, 403b or 457 retirement plans reduce the income reported on a W2 and have the same effect of reducing the AGI. By increasing your contributions to these accounts, you will lower your adjusted gross income. This might be enough to give you a bigger slice of the tax break pie. Plus, money in your retirement accounts is sheltered from the financial aid calculations, which can increase your chances of getting more financial aid from the college.
Tax questions are never easy to answer and it is essential that you talk to a professional accountant. In addition, tax laws are constantly changing. To get the latest (and free) information, surf over to the IRS website at http://www.irs.gov or schedule a phone or personal appointment. You can call 800-829-1040 with questions, or try the IRS's Everyday Tax Solutions service by calling your local IRS office to set up an in-person appointment. If you have access to TTY/TDD equipment, call 800-829-4059.
Paying for college is all about saving as much money as you can, whenever and wherever you can. Avoiding or reducing taxes is certainly one way to do so. It may not be a windfall, but again, every little bit counts. So while every year we dread the arrival of tax day at least when it comes to paying for education, there is good news. Every dollar that we save probably will go directly to the college, but most families would agree that they would much rather pay the tuition collector than the tax collector.
Gen and Kelly Tanabe
Founders of SuperCollege and authors of 13 books on college planning.
By: Gen & Kelly Tanabe
Need money for college? Stressed over how to pay the next tuition bill? Searching for a way to get a degree without going broke? Whether you need a full-tuition scholarship or a little extra cash to make ends meet, 1001 Ways to Pay for College provides students and parents with the answers.
By: Gen & Kelly Tanabe
Learn how to go back to school without going broke. This is the only book that shows you how to find the best scholarships for adult students, get your employer to pay, have your student loans forgiven and much more.