Regarding the issue of 1098-T Box 5(Scholarship or Grant) exceed the amount on Box 2 (Amount billed for qualified tuition and related expense) and Financial Aid, I have researched some information and come up with an explanation; correct me if I am wrong.
First let’s look at what is Scholarship and Fellowship, according to IRS definition
A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate.
A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.
(Reference: Publication 970 http://www.irs.gov/publications/p970/ch01.html#en_US_publink100020746 )
A Financial Aid is considered money available from federal, state, university, and private sources to help students meet college costs. It is treated as a scholarship for the purpose of their tax treatment. That includes Tuition and fees, Room and Board, Books and supplies, personal expenses, and Transportation. However this does not mean that the amount on Box 5 of 1098-T do includes expenses that are not qualified education expense (eg. Room and Board, Personal Expenses, Transportation costs). For example, a student applied from FAFSA (Free Application for Federal Student Aid) through school is considered Federal Grants. According to Department of Education, Federal grants may include Pell Grants, Federal Supplement Educational Opportunity Grants, Academic Competitiveness Grant, and etc. (Reference: http://federalstudentaid.ed.gov/presscenter/title4_programs.html ) California State grant includes Cal Grant. (Ref: http://www.calgrants.org/ ) They are also called the Title IV Need-Based Education Grants, this is also mentioned in IRS Publication 970. These grants unlike student loan do not need to be paid back. There are Federal or State grant only granted through need-based program. According to the Financial Aid Article of University of California, Santa Cruz, page 4:
The basic premise for all need-based financial aid programs is that students and their families, to the extent they can contribute, have the primary responsibility for financing the cost of the student’s education. Your family is expected to utilize its resources to make higher education a priority.
Need-based financial aid, which is the type of financial aid that most students around our area that claim, because they claim to possess the status of a low income family. The eligibility of a student for need-based financial aid is calculated by a Federal formula, it is also called the Estimated Family Contribution (EFC) formula:
Estimate of Cost (Standard Student Budget)
Minus Parent contribution
Estimated Family Contribution
Minus Student contribution
Minus Other resources (scholarships, VA benefits)
Equals Need-Based Aid Eligibility
This is a example Standard Budget used by UC Santa Cruz, almost every school has a different Cost of Attendance,
|Standard Budgets for California Residents 2008–09|
|Budget Item||Undergraduate Student||Graduate Student|
|Fees||$ 9,534.00||$ 11,871.00|
|Books and Supplies||$ 1,356.00||$ 1,425.00|
|Food and Housing||$ 13,038.00||$ 14,265.00|
|Personal Expenses||$ 1,470.00||$ 2,493.00|
|Transportation||$ 840.00||$ 1,734.00|
|Total||$ 26,238.00||$ 31,788.00|
(Reference: UC Santa Cruz, http://www2.ucsc.edu/fin-aid/0809forms&pubs/0809_YGTFA.pdf )
USC Student Standard Budget:
UC Berkeley Standard Budget:
UCLA Standard Budget
UC Irvine Standard Budget
UC Riverside Standard Budget
Cal State LA Standard Budget
Cal State Pomona Standard Budget
Cal State Long Beach Standard Budget
Cal State Northridge Standard Budget
Pasadena City College Standard Budget
East Los Angeles College Standard Budget
I look at the Financial Aid worksheet provided by the Department of Education (DOE) for FAFSA, they have taken into consideration of the parent’s income, the benefits they get from the federal government, saving, investment, tax liability, tax exemption and etc. (Parent Contribution); and also the includes the Student’s income, other resources of benefits such as Veterans’ education benefits (Other Resources), their housing status whether they live on campus or off campus, and etc. (Student Contribution)
Common sense tells me that the DOE will most probably process the information and minus away whatever expenses that can be covered by the family or other resource, such as housing, food, and transportation from the annual Standard budget since these are costs usually provided by the parents. This is especially so for Asian community in Great Los Angeles Area. Whatever amount that is left from the deduction will become the Student’s eligibility for Financial Aid. In this case it will only include Fees, Books and Supplies, which are tax free according IRS rule, Publication 970.
Almost every year, the Standard Budget will change, from my understanding of the Financial Aid eligibility Federal Formula, the amount of Student received from Financial Aid is determined by the net of the Standard Budget and the Estimated Family Contribution, and the amount they received should represent the number in Box 5 of 1098-T. If we know what school they are in and take a look at the Standard Budget of the year, we can determine what amount is qualified and what amount that is not.
I am unable to find out any information about some taxpayers’ claim that the excess amount on Box 5 will be carry over to next year. From my understanding, if the amount of financial aid given to a student is determined by an annual basis, and the application of the federal formula, there should not be any excess of Financial Aid that can be carried over to the next year. Since the amount of Federal and State funds for Financial Aid is limited, the amount that is given to a student should only be able to cover whatever that is needed for that particular year.
From my research, I draw my conclusion that whatever excess amount between the net of Box 5 and Box 2 is taxable, because that might includes Food, Housing, Personal Expenses, Transportation. Since the amount in either Box 1 or Box 2 already reflects total amount of qualified tuition and related expenses either paid or billed (Ref: http://www.irs.gov/pub/irs-pdf/f1098t_08.pdf page 4)
For Scholarship and fellowship other than Need-based Financial Aid
For this type of scholarship, such as school scholarship or fellowship, it should also be given according to the Standard Budget or it is called the Cost of Attendance. There are different standard for resident or non-resident student. For non-resident full scholarship recipient, all of their cost, that includes tuition fees, books and supplies, housing, food, personal expenses, and transportation should be all compensated by the school. I strongly believed that those amounts are drawn from the Standard Budget.
All of the above are just my understanding of the issue, because I am unable to find any official documents that answer specifically to the question regarding the excess amount net of the Box 5 and Box 1 or 2. Please feel free to doubt my understanding.