Scholarship Tax Year Question

[ck25]

I have a question for any tax experts here. I recently graduated from grad school. During my time in school, I had a fellowship, which paid my tuition costs plus a living stipend.

Unfortunately, my school reported the scholarship and the tuition to the IRS in a strange way. The tuition was billed before I received the scholarship money, so during winter semesters, I was billed tuition at the end of one tax year, but did not receive the scholarship for that semester until the beginning of the next tax year.

Thus, for my first year in school, the Tax form the school sent to me and the IRS showed two semesters worth of tuition and only one scholarship disbursal. This artificially would have deflated my income for 2013 but inflated it for 2014. Wanting to avoid being in a higher tax bracket for 2014, I reported the scholarship money as income for 2013 even though the form the IRS received did not list it. As far as I was concerned, this makes sense because that scholarship money was intended to pay for the tuition that was reported, and I believe someone from the school told me that it would be fine to report it this way.

Anyway, 2014 was fine because during that time I received one stipend and one tuition bill for each semester (even though they were misaligned). Now that I graduated in 2015, my tax form from the school will list one stipend disbursement and zero tuition paid. I should obviously not have to pay tax on this final stipend since I already reported an extra stipend during the first semester. However, I am worried that the IRS will not make this connection and will try to claim that I owe them money when they receive the tax form from my school saying I received income in 2015.

Does anyone know if what I did was allowed? To summarize, I basically reported income that I received in early 2014 as income for 2013 and I reported income in early 2015 as income for 2014, and now I will not report that early 2015 income during the 2015 tax year. Is this okay? Will the IRS try to make me double-pay? Is there any way I can alert them of why I am not reporting this income during 2015?

Here is more detail with actual dollar amounts:
Cost of Tuition and Scholarship amounts by intended semester:

Semester	Tuition	Scholarship
Sept-Dec 2013 (Semester 1)	$10k	$20k
Jan-Mar 2014 (Semester 2)	$10k	$20k
Apr-Jun 2014 (Semester 3)	$10k	$20k
Sept-Dec 2014 (Semester 4)	$10k	$20k
Jan-Mar 2015 (Semester 5)	$10k	$20k

Reported to IRS by the school:

Tax Year	Tuition	Scholarship
2013	$20k	$20k
2014	$30k	$60k
2015	$0	$20k

Reported to IRS by Me:

Tax Year	Tuition	Scholarship
2013	$20k	$40k
2014	$30k	$60k
2015	$0	$0

Thanks!

[teen persuasion]

Schools can report either amounts billed, or amounts paid. 

The amounts and dates billed are actually useless numbers; what really counts are amounts and dates paid.  When were your tuition bills paid?  Did you pay them out of pocket, and then get reimbursed by the scholarship funds, or was your bill simply credited once the scholarship funds were applied?

Some schools deliberately bill the spring semester to be paid well before Dec 31, so that both fall and spring semesters are paid in a single calendar year.  Others have payment deadlines in Jan, so you end up with 1 semester, 2 semester...1 semester spreads, but I've never seen the bills and scholarships separated in different tax years.  However, if there's one thing I've learned about colleges, it's that every one is different, there is no consistency.

[ck25]

In my case the bills were paid by the scholarship money, once it posted to the account. So it was something like this:

December: Tuition posted (due by February)
January: Scholarship posted - Tuition cost and stipend
January: Tuition payed from scholarship
January: Stipend disbursed to me

[Cathy]

The first thing you need to determine is whether the scholarships or any portion thereof need to be included in gross income at all. Subject to conditions, "qualified scholarships" are not included in gross income. 26 USC § 117.

For the purpose of figuring the amount of American Opportunity Credit and Lifelong Learning Credit that you can take, what matters is when the expenses were paid and whether those expenses relate to an academic period beginning during the same taxable year as the payment. 26 USC §§ 25A(b)(1), 25A(c)(1). If expenses are prepaid "by the taxpayer during a taxable year for an academic period which begins during the first 3 months following such taxable year, such academic period shall be treated ... as beginning during such taxable year". 26 USC § 25A(g)(4). The amount of expenses that would otherwise be included for these credits must be reduced by the amount of qualified scholarships that were not includible in gross income. 26 USC § 25A(g)(2)(A).

The OP says nothing about claiming tax credits, but user "teen persuasion" seems to have assumed you were asking about them, because she says that the relevant date is when the expenses were paid. That is true for claiming credits only. However, the date on which the expenses were paid is wholly irrelevant to what year the scholarships are included in gross income (if any), which is what your post actually asks about. I discuss that next.

Assuming the scholarships or a portion thereof are indeed includible in gross income, you cannot just decide to include the amounts in the taxable year that is most convenient for you. Instead, you have to apply your normal "method of accounting". 26 USC § 446(a). Most individuals use "the cash receipts and disbursements method" ("cash accounting"), although technically this is just one method among several permissible ones. 26 USC § 446(c). Under that method, the general rule is that "any item ... shall be included in ... gross income for the taxable year in which received by the taxpayer". 26 USC § 451(a). However, the regulations clarify that an item is "received" for the purpose of the statute when you have a definite right to receive it, even if not actually received yet (subject to exceptions). 26 CFR 1.451-2(a). Application of that test to your scholarship income would require a close reading of any documents governing the money that you may have signed as well as any relevant university policies. I repeat that you cannot just choose the year that you feel is the most convenient.

If it turns out that your returns did not represent legally defensible tax positions, you can and should amend them. You can always attach a statement to your paper returns to explain a position that you think might not be otherwise obvious. Depending on the nature of the position, in some cases you may have to use Forms 8275 ("Disclosure Statement") and 8275-R ("Regulation Disclosure Statement").

This is general information only. If you need help applying it to your specific situation, you may want to retain counsel.

[ck25]

thanks so much Cathy for your super detailed explanation! This really helped me understand where we went wrong... now we just need to fix it

The first thing you need to determine is whether the scholarships or any portion thereof need to be included in gross income at all. Subject to conditions, "qualified scholarships" are not included in gross income. 26 USC § 117.

modified the original post to show how much the tuition vs scholarship was. we received more scholarship than the cost of tuition (to the tune of $10k per semester) so I think the amount over tuition cost should be included in our income

The OP says nothing about claiming tax credits, but user "teen persuasion" seems to have assumed you were asking about them, because she says that the relevant date is when the expenses were paid. That is true for claiming credits only.

Yep, we never claimed any credits since our tuition expenses were always less than the scholarships received.

Assuming the scholarships or a portion thereof are indeed includible in gross income, you cannot just decide to include the amounts in the taxable year that is most convenient for you.

I think that we essentially did decide to include the amounts in the taxable year that was convenient :( our income in 2013 was 1/3 of what our income is going to be in 2015, so we realized counting the income sooner would result in a lower marginal tax rate. we just didn't realize that we weren't allowed to do this since we figured that if the school had counted the tuition, we should be able to align the scholarships received for that tuition

If it turns out that your returns did not represent legally defensible tax positions, you can and should amend them. You can always attach a statement to your paper returns to explain a position that you think might not be otherwise obvious. Depending on the nature of the position, in some cases you may have to use Forms 8275 ("Disclosure Statement") and 8275-R ("Regulation Disclosure Statement").

This is general information only. If you need help applying it to your specific situation, you may want to retain counsel.

What is the best way to go about doing this? We think we need professional help to dig ourselves out of this very confusing situation. This is also made a little more complicated that we no longer live in the state that this happened in (CA), and we would need to amend our state tax returns as well. If we talk to an accountant in our new state, would they be able to help us with the CA state tax returns?

Do you know how much approximately it would cost to hire someone to amend the 2013 and 2014 tax returns and also help us file the 2015 return?

We want to avoid being caught off guard with a big tax bill when filing our 2015 tax return because we will be buying a home in the first part of 2016, so we're wondering if it's possible to address this sooner than tax time?

[teen persuasion]

Cathy, thank you for the detailed explanation on the distinction between when expenses are incurred and when scholarships are included in income.  Very interesting nuance.

[Cathy]

modified the original post to show how much the tuition vs scholarship was. we received more scholarship than the cost of tuition (to the tune of $10k per semester) so I think the amount over tuition cost should be included in our income

Note that a scholarship is not includible in gross income to the extent that the amount was used for "fees, books, supplies, and equipment required for courses of instruction" assuming that (1) the terms of the scholarship allowed the money to be used for that purpose, and (2) all other requirements under the statute are satisfied. 26 USC § 117(b)(2)(B). You may want to investigate whether you used some of the scholarship amounts to purchase qualifying books, supplies, etc., potentially reducing the amount of the scholarship that is properly includible in gross income.

... This is also made a little more complicated that we no longer live in the state that this happened in (CA), and we would need to amend our state tax returns as well. If we talk to an accountant in our new state, would they be able to help us with the CA state tax returns?

I do not know what services accountants in your state offer. However, it should be noted that I only discussed the federal tax laws in my post. In theory, a state could have totally different rules. In practice, I don't think any state has materially different rules with respect to which year amounts should be included in gross income, but you may want to investigate that nonetheless (or the person you retain can investigate that).

What is the best way to go about doing this?

You can amend your federal tax return by filing Form 1040X. For the state return, each state establishes its own procedure for amending a state return.

Do you know how much approximately it would cost to hire someone to amend the 2013 and 2014 tax returns and also help us file the 2015 return?

I do not know how much you will be charged for these services.

...we're wondering if it's possible to address this sooner than tax time?

You can amend your federal returns at any time; there is no need to wait. Each state establishes its own rules regarding amended returns, but they can probably be amended at any time as well. Note that if the amended return causes you to receive a refund, there are limitations periods that may prevent you from receiving the refund if you wait too long to amend the return. These limitation periods can be different in every state. Therefore, you should investigate this promptly.