Saturday, January 15, 2011

Are Lindsey Nicole Henry Scholarships taxable as income?

Tulsa Public Schools has reportedly told the parents of six students that the Lindsey Nicole Henry Scholarships are taxable as income. The six students' scholarship requests were processed last October as part of a limited group approved by the school board.

This effort to confuse and raise doubts about the program in the minds of parents is not new. This specter was raised during the debate on House Bill 3393 during the 2010 legislative session. 

It seems parents were led to believe that the Lindsey Nicole Henry Scholarship Program is a Qualified State Tuition Program - which are 529 college savings accounts. Lindsey's Law is not a 529 college savings account.

To my knowledge the IRS has not considered any scholarships from programs similar to Lindsey's Law to be taxable. And there are currently a number of scholarship programs around the country - some have been in place for more than a decade. Oklahoma was the sixth state to pass a special-needs scholarship program into law. 

Here is some information that was provided to me as I researched House Bill 3393 last spring. I'm passing it along as general information - not as tax advice. 

Tax-Free Scholarships and Fellowships
A scholarship or fellowship is tax free only if:
· You are a candidate for a degree at an eligible educational institution, and
· You use the scholarship or fellowship to pay qualified education expenses.
Candidate for a degree.   You are a candidate for a degree if you: 
1.  Attend a primary or secondary school or are pursuing a degree at a college or university, or
2.  Attend an accredited educational institution that is authorized to provide:
a.  A program that is acceptable for full credit toward a bachelor's or higher degree, or
b.  A program of training to prepare students for gainful employment in a recognized occupation.
Eligible educational institution.   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
Qualified education expenses.   For purposes of tax-free scholarships and fellowships, these are expenses for:
· Tuition and fees required to enroll at or attend an eligible educational institution, and
· Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
You will find this information in IRS Publication 970 on the IRS website.

This should clarify any confusion created by school officials comparing Lindsey's Law to a Qualified State Tuition Program - 529 college savings accounts (see IRS Publication 525).  

I encourage parents to read the IRS information, draw your own conclusions, and consult a tax attorney for tax advice on your specific situation. 

I am not a tax attorney, but I can read. After reading information from the IRS, it is clear to me that K-12 tuition scholarships are not taxable regardless of what parents may have been told. 
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