If a school offers a student money that’s considered taxable income — perhaps as part of a teaching assistantship or fellowship — then it must provide the student with a Form W-2, reporting taxes withheld.
Prior to tax time, your school will also report qualified tuition expenses on Form 1098-T, along with the details on the amount of scholarships, fellowships and grants received.
Hold onto your receipts for textbooks, supplies and equipment, said Kantrowitz. Form 1098-T won’t have that information.
Who’s ultimately responsible for reporting the tax load? For dependent students, Mom and Dad would report the scholarships on their return.
In this case, a taxable scholarship is considered “unearned income,” subjecting it to the kiddie tax if the child is under 19 or is a full-time student under age 24, Steffen said.
Under the old tax code, this would’ve meant that unearned income exceeding $2,100 is subject to the parents’ rates, and families would use Form 8615 to calculate the liability.
Under the new tax law, however, the “unearned income” will instead be subject to the trust income tax rates — meaning that taxable income exceeding $12,500 will be taxed at the top rate of 37 percent.
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“For children of parents at lower levels of income, this change in the kiddie tax could mean a big tax increase,” Steffen said.
“On the other hand, kids of higher-income parents may get a small break by getting to start over at the bottom of the trust tax brackets,” he said.
A graduate student who files on his own would report the scholarship or fellowship on his own income tax return.
Graduate students should also bear in mind that as recently as last fall, Congress had set its sights on taxing tuition waivers as part of an overhaul of the tax code.
Tuition waivers can be significant, particularly when they cover a whole year’s worth of schooling. “It can be in the $40,000 to $50,000 a year range,” said Kantrowitz. “It’s a substantial tax bill that would exceed the living stipend.”
This provision ultimately didn’t make it into the Tax Cuts and Jobs Act.
“It shows where Congress is leaning on these things,” said Steffen. “It could come up again.”