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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10142
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My son attends the Citadel on a full basketball scholarship.

Customer Question

My son attends the Citadel on a full basketball scholarship. When I did my taxes I was told he has to file because he received more than the tuition
Submitted: 9 months ago.
Category: Tax
Expert:  Lane replied 9 months ago.

Hi - I can help here

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I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, Social Security & Medicare, estate, corporate & tax advice since 1986.

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That's correct, although qualified scholarships are excluded from gross income under IRC Section 117, which means that the recipient does not pay tax on the scholarship funds. To get this tax-free treatment:

  • The student must be a degree candidate at an eligible educational organization; and,
  • The scholarship must be used for qualified expenses.

Qualified expenses are tuition and fees, as well as books, supplies and equipment required for coursework.

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(Room and board, travel, and other costs are not qualified expenses).

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Expert:  Lane replied 9 months ago.

With that as the foundation we have the rather new regulation, Treas. Reg. Section 1.117-4

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Under the law, if the student is required to perform services for the school to receive the scholarship (laboratory research, for instance), the funds attributable to the services provided to the school are equivalent to taxable wages

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Expert:  Lane replied 9 months ago.

So this restrictive language in the law now implies that an athletic scholarship may not completely qualifiy as true educational assistance, and crosses the line as payment for services to the school.

Expert:  Lane replied 9 months ago.

The OLDEST revenue ruling in this area (Rev. Rul. 77-263), deems an athletic scholarship is nontaxable only as follows:

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  • The scholarship does not exceed expenses for tuition, fees, room, board, and necessary supplies.
  • The school expects but does not require the student to participate in a particular sport.
  • The school does not require any particular activity in lieu of participation and doesn’t cancel the scholarship if the student cannot participate.

Now, the first condition in this ruling doesn't mean that an athletic scholarship can be used to provide students with tax-free room and board.

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What it means is thatynthat the total scholarship awarded (both taxable and non-taxable portions) must not exceed the total cost of attending the school. If this and the other two conditions are met, then the portion of the athletic scholarship covering qualified expenses will be tax-free and not treated as payment for services.

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Sorry for the data-dump, but this should provide you with the context, and where the lines are drawn

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IRS Pub. 970, Tax Benefits for Education, bears this out: Athletic scholarship recipients are referred to the same worksheet used by all scholarship recipients to determine the taxable and nontaxable parts of scholarship funds received.

Expert:  Lane replied 9 months ago.

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I hope this has helped.

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Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd really appreciate a positive rating (using the rating request, faces, or stars on your screen)

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That's the only way I'll be credited for the work here.

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Thank you!

Lane

Customer: replied 9 months ago.
Since this is a military college the scholarship covers his uniforms and up keep, is this taxed?
Expert:  Lane replied 9 months ago.

Yes, so sorry. Anything that's not tuition and required for the education itself is taxable.

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See this from the Private letter ruling requested and granted To the Citadel

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"Also, awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified tuition and related expenses (subject to the limitations provide in Code section 117(b)).

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Qualified education expenses do not include the cost of:

  • Room and board.
  • Travel.
  • Research.
  • Clerical help.
  • Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.
Expert:  Lane replied 9 months ago.

I hope you’ll rate me (using those stars, rating request, or faces on your screen) based on thoroughness and accuracy, rather than any good news / bad news content. That’s the only way I’ll be credited for the work here. But please let me know if you still have questions.

Thank you!

Lane

Expert:  Lane replied 8 months ago.

Hi,

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I’m just checking back in to see how things are going.

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Did my answer help?

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Let me know…

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Thanks

Lane