Intern getting screwed on taxes

[rxfudd]

So here's my tax situation for 2006:

My W2 for 2006 is around $16,500 (1/2 year of intern salary, minus one month of pay for some reason that will probably get carried over to next year). I have no other income and only $300 or so in student loan interest capitalization to deduct. Filing single, no other weird tax issues to report.

I had received a scholarship in April of 2006 for $26,100 (I know, lucky me). This got retroactively distributed as Q1 $6,087, Q2 $6,087, Q3 $6,962, Q4 $6,962. My med school was on a quarter system, and 3/4 of my tuition for that year got billed in 2005 (bastards billed winter tuition on Dec 28), and $9,000 in 2006. I got my 1098-T this week and this is what it showed: $9,000 qualified tuition and expenses paid and $26,100 in grants.

Here's the problem: the way it appears on the 1098-T, I would owe taxes on the nonqualified portion of the scholarship, or about $17,000 worth - this results in about $1,500 in OWED taxes this year. However, even assuming that both winter and spring distributions can be counted as taxable, if I subtract the distributions that were retroactively applied to summer and fall quarters, I only owe a couple hundred bucks.

I realize that this will probably require a tax professional, but does anyone have any insight into how this works? I know that qualified tuition is very date/time sensitive (if your school applies the tuition as paid in 2005, that's just the way it goes). How about scholarships that are retroactively distributed? Is it the date that they actually make the distributions that determines what year it falls in, or the year in which the money is applied? I seriously don't have $1,500 lying around. This sucks.

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[dpmd]

How did you pay tuition before you got that scholarship? If it was loans that you subsequently cancelled, I would ask your school to adjust the way the scholarship was applied, so that it more closely approximates your tuition due dates. I had a scholarship that disbursed late. The school at first was just going to apply it to the spring semester, leaving me with the loans I had taken for fall. I asked them to distribute it between the two semesters so I didn't have any time where my scholarship was more than my tuition. You should see if your school will help you out. Otherwise, I think you might be screwed.

 

[rgerwin]

I don't believe you have to pay taxes on a scholarship. Check that first.

 

[dpmd]

Well, the OP understands that you don't have to pay taxes on scholarships that just cover tuition and fees, but anything extra may be taxable (check the irs.gov site for more info).

 

[rgerwin]

"Payments of scholarships, fellowships, and grants paid to U.S. citizens and resident aliens are not generally reportable to the IRS and are not generally subject to withholding of tax. However, payments of taxable scholarships, fellowships, and grants to nonresident aliens are generally reportable to the IRS and are generally subject to withholding of U.S. Federal income tax."

From the IRS website. I hope this helps!

 

[dpmd]

I don't know where you found that, but that just means you didn't have to have tax witheld on the scholarship when you received it. The complete answer is present here

"If you received a scholarship or fellowship, all or part of it may be taxable, even if you did not receive a Form W-2. Generally, the entire amount is taxable if you are not a candidate for a degree.

If you are a candidate for a degree, you generally can exclude from income that part of the grant used for:

* Tuition and fees required for enrollment or attendance, or
* Fees, books, supplies, and equipment required for your courses.

You cannot exclude from income any part of the grant used for other purposes, such as room and board.

A scholarship generally is an amount paid for the benefit of a student at an educational institution to aid in the pursuit of studies. The student may be in either a graduate or an undergraduate program.

A fellowship grant generally is an amount paid for the benefit of an individual to aid in the pursuit of study or research.

Example 1
Tammy Graves receives a $6,000 fellowship grant that is not designated for any specific use. Tammy is a degree candidate. She spends $5,500 for tuition and $500 for her personal expenses. Tammy is required to include $500 in income.

Example 2
Ursula Harris, a degree candidate, receives a $2,000 scholarship, with $1,000 specifically designated for tuition and $1,000 specifically designated for living expenses. Her tuition is $1,600. She may exclude $1,000 from income, but the other $1,000 designated for living expenses is taxable and must be included in income."