Question

Ms Mary was accepted to Big State University and received a reduced tuition from $50,000 to $20,000. Mary also received a scholarship of $30,000 to attend Big State University. Since Mary's tuition is $20,000 she will use the remaining portion to cover her room and board expenses. BSU also offered Mary a part-time job as an admin. assistant where she will be paid $2,500 per year. Mary Smith needs your help in determining what is taxable and what is not taxable. Please use IRS publication 970 and let her know what /if anything is taxable and what is nontaxable and any other info that is relevant. Please write at leat 200 words to explain why.

Answer 1

(a) As per IRS publication 970 with respect to scholarship received, the following provisions are there:-

A scholarship or fellowship grant is tax free only to the extent:

• It doesn't exceed your qualified education expenses;

• It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and

• It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship.

(b) Based on the above provison , in our case Mary received $ 30,000 from BSU as scholarship, whereas her tuition fee has been reduced to $ 20,000. So, she is required to pay tuition fee of $ 20,000 only & balance $ 10,000 to cover her room & board expense will not qualify for exemption. Hence only $ 20,000 will be non-taxable & balance $ 10,000 will be taxable.

Further $ 2,500 received from part time job will also be taxable.

Hence the gross income will be $ 12,500 ( 10,000 + 2,500 )

(c) Other relevant information:-

She can claim standard deduction of $ 12,000 which was for year 2018*.

* This may change as per the relevant year for which the question relates.