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From the Tax Hotline

By: Tax Hotline
Summer 2023 (Vol. 41, No. 2)

Q: Is my college student’s scholarship taxable?

A: That depends. Generally, a scholarship is an amount paid or allowed to a student at an educational institution for the purpose of study. It can include both merit and need-based institutional aid and may also be referred to as a grant. Other types of grants include need-based grants (such as Pell Grants or state grants) and Fulbright grants. A fellowship grant is generally an amount paid or allowed to an individual for study or research.

Fulbright grants may be either scholarship/fellowship income or compensation for personal services, which is usually considered wages. If you are a U.S. citizen recipient of a Fulbright grant, you must determine which income category your grant falls into to know how the grant is taxed for U.S. Federal Income tax purposes.

If your child receives a scholarship, a fellowship grant, or other grant, all or part of the amounts received may be tax-free if your child meets certain conditions. Scholarships, fellowship grants, and other grants are tax- free if:

  • The student is a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and

  • The amounts the student receives are used to pay for tuition and fees required for enrollment or attendance at the educational institution or for fees, books, supplies, and equipment required for courses at the educational institution.

However, the student must include in gross income:

  • Amounts used for incidental expenses, such as room and board, travel, student health insurance, and optional equipment.

  • Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. However, students do not need to include in gross income any amounts received for services that are required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning- service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college.

Generally, a student reports any portion of a scholarship, a fellowship grant, or other grants that must be included in gross income as follows:

  • If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on the “Wages, salaries, tips” line of the student’s tax return. If the taxable amount was not reported on Form W-2, enter “SCH” along with the taxable amount in the space to the left of the “Wages, salaries, tips” line.

  • If filing Form 1040-NR, report the taxable amount on the “Scholarship and fellowship grants” line.

If any part of a scholarship or fellowship grant is taxable, the student may have to make estimated tax payments on the additional income.

Q: I don’t list my hobby as a business or take any deductions for expenses associated with it. Do I still have to report the income?

A: Yes, the income is taxable and reported on Schedule 1, form 1040. You cannot deduct hobby expenses.

A hobby is any activity that a person pursues because they enjoy it without intending to make a profit. When determining whether your activity is a business or hobby, consider the following nine factors:

  • Whether the activity is carried out in a business-like manner and you maintain complete and accurate books and records.

  • Whether your time and effort in the activity show you intend to make it profitable.

  • Whether you depend on income from the activity for your livelihood.

  • Whether any losses are due to circumstances beyond your control or are normal for the startup phase of their business.

  • Whether you change methods of operation to improve profitability.

  • Whether you and your advisors know how to conduct the activity as a successful business.

  • Whether you successfully made a profit from similar activities in the past.

  • Whether the activity makes a profit in some years and how much profit it makes.

  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

Q: How do I notify the IRS of the death of a taxpayer?

A: You just note the death on the final tax return. Write “Deceased” beside their name along with date of death. A surviving spouse or personal representative can file the final return. Here are two things taxpayers should know about filing the final return:

  • The surviving spouse generally is eligible to use the married filing jointly or married filing separately filing status when filing the return.

  • Surviving spouses with dependent children may be able to file as a Qualifying Widow(er) for two years after their spouse’s death. This filing status allows them to use joint filer tax rate schedules (which can be beneficial, depending on income level) and, if they don’t itemize deductions, claim the highest standard deduction amount.

Q: Can I deduct the cost of summer camp for my child?

A: You may qualify for the credit whether you pay for care at home, at a daycare facility, or a day camp. Your expenses must be for the care of one or more qualifying persons, such as your dependent child under age 13. Here’s what you need to know:

  • You must be paying for the care so you can work or look for work.

  • The total expense you can claim in a year is limited. The limit is generally $3,000 for one qualifying person or $6,000 for two or more.

  • The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on your income.

  • Certain types of care don’t qualify for the credit, including overnight camps, summer school tutoring, care provided by your spouse or child under age 19 at the end of the year, and care given by a person you can claim as your dependent.