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Scholarships, grants, gifts and, as of 2018, 529 plans can significantly help families of independent school students pay tuition and fees, but they may have tax implications. Schools can help families understand these implications so that they’re not surprised come tax time. Mike Szydlowski, director of financial aid at Woodberry Forest School, shared how to explain potential tax implications at the 2019 NBOA Annual Meeting, in the session “Complex Financial Aid Compliance Issues” (recording and summary available to all NBOA members). Woodberry Forest includes a notice about tax implications in its aid award letter.
For business officers looking for guidance, the key document to study is the IRS Publication 970, which explains tax benefits for those saving for educational expenses. A relatively recent development is families’ ability to use 529 plans, also known as qualified tuition programs, to pay up to $10,000 in school tuition and fees annually and tax-free at the federal level. The investments may be subject to state taxes, however, and any income taxes or credits claimed may be subject to recapture.
529 plan funds can also be used to pay college and university tuition and fees, and higher-education institutions are required to send families 1098-T forms demonstrating that and how institution was paid, including information on scholarships and grants. K-12 schools receiving funds from a 529 plan have no reporting requirement, but would do well to send information to families, said Szydlowski. That way when a family submits a tax return, the IRS can see where tuition was billed.
Parents of international students may need to be educated about tax reporting requirements in regard to financial aid. IRS Publication 901 discusses whether a tax treaty between the U.S. and a particular country offers a reduced rate or complete exemption from U.S. income tax for residents of that country.
Families may also want to know that gifts for educational expenses are one of two exceptions to a donor’s exclusion limit (health care is the other exception). The exclusion limit stipulates that an individual’s gifts beyond $15,000 are subject to taxes, but educational gifts beyond that limit are not taxed. Someone, such as a grandparent, gifting tuition to a student must write the check directly to the school to take advantage of the tax benefit.
For more information, listen to the recording of the session, peruse the slides or read the executive summary in the NBOA Library.
