Question

Vanessa Lazo was an amazing high school student and so it was no surprise when she was accepted into Prestige Private University (PPU). To entice Vanessa to attend, the school offered her a reduced tuition of $13,000 per year (full-time tuition would typically be $43,000). PPU also has a scholarship program thanks to donors, and Vanessa was awarded an annual scholarship of $20,000. The first $13,000 must be used to cover her tuition, and the remainder can be put towards room and board at PPU. Lastly, PPU offered her a part-time job on campus as a lab assistant, for which she will be paid $1,500 for the year. You are the Lazo's CPA and they have requested you write them a letter explaining how much of this package will be taxable to Vanessa each year. Make sure your letter is professional and properly references Publication 970.

Answer 1

To: Vanessa Lazo

From: XYZ, CPA

Date: 29/01/2019

Subject: Taxation of Annual Scholarship and Pay Package

________________

This memo is with respect to your query regarding taxation of your annual university package comprising of scholarship and annual salary as lab assistant. I would like to inform you that as per the applicable rules any amount of scholarship that is adjusted against qualified educational expenses (which includes tuition fees, but excludes any amount incurred towards room and board) is not considered as taxable income. In other words, out of the $20,000 annual scholarship received by you, the amount ot $13,000 that will be used to pay tuition fees will not be taxable. However, the balance amount of $7,000 ($20,000 - $13,000) will be treated as taxable as it will be used to cover room and board expenses. In general, qualified tuition reduction is not considered taxable if it is provided by an eligible educational institution. [Refer to Scholarships, Fellowship Grants, Grants, and Tuition Reductions of Publication 970]

With respect to the annual salary of $1,500 as lab assistance, the entire amount will be considered as taxable as it will not be considered as qualified tuition reduction. Therefore, the total amount of package that would be considered taxable would be $8,500 ($7,000 + $1,500). Please let me know in case you need any further assistance in the matter.

_____

Regards

XYZ

CPA