Today is Tax Day—the least favorite day of the year for most. For parents of students heading to college, there are a few tax filing tips you might need to know when filing next year’s taxes. Being prepared in advance will assure that you won’t be caught off guard next year.
How are college savings plans such as 529s taxed?
If funds from the 529s or other college savings plans are withdrawn to pay for qualified education expenses, they are not taxed. Any money withdrawn beyond those qualified expenses will be subject to tax.
Are 529s in the student’s name provided by grandparents counted as untaxed income? Any funds distributed from these plans are considered untaxed income and should be reported on the student’s income tax return if he is required to file.
Are financial aid grants and scholarships considered income?
If the scholarship is made out to the student, it is considered the student’s income. Any money the student receives the student will have to report, but only when it exceeds education expenses. If your student receives scholarships and grants that exceed the costs of tuition, fees, books, and required course-related equipment and supplies, he is required to report the excess funds as taxable income. Funds used to pay room and board, travel, and non-required equipment and supplies are also taxable. Scholarship and grant recipients should retain fee statements, textbook receipts, and similar records to support their calculations of the non-taxable and taxable portions of their awards.
For instance, if your student gets several different scholarships that cover all of his qualifying expenses and has some money left over after paying qualified education expenses, that extra amount is taxable.
For more information regarding tax benefits for college students, check out this article I wrote for University Parent: Tax Filing Tips for College Parents.
Check out my guide for parents: Parents Crash Course