If you follow me on twitter you might’ve noticed my tweet on the 19th of October about the mistakes I made on my tax return and the current status of said tax return. Just in case you didn’t catch the tweet, here’s a screenshot of the tweet:

I thought I’d expound just a little bit more about what’s really going on and touch on a couple lessons I’ve learned throughout this whole process.

The two big problems

I received a private scholarship during the 2009 winter/spring semester for $2,000 which for one reason or another I did not claim on my tax return. Truthfully at the time I probably figured it’s a scholarship, why would I need to claim it as income? Turns out I was very wrong. More on that in a second. The other big problem on the tax return was the way I claimed my wife’s education credit. Her employer paid for the vast majority of her education expenses up front (they provided an education credit card). In actuality she had very few expenses for school that she paid out of pocket, but I obviously made a mistake somewhere because I tried to claim about $3,000 of the $8,500 her tuition rang up to that year.

Oops.

It was definitely my fault in both cases. So after weeks of back and forth with the tax guy (as I mentioned in my previous post on this situation I paid for audit defense insurance when I filed my taxes this year) we’ve come to the conclusion that I’m definitely going to owe around $1,000 dollars to the IRS. Not quite as bad as the original $1,200 – $1,300 estimate, but still a pretty big chunk of money. All of the errors the IRS claimed were definitely errors on my part, but the tax guy was able to find a credit I didn’t claim, so that’ll reduce the overall amount I owe. Thanks Chuck!

Here’s the deal with the scholarship

According to my tax guy (and I’m no expert so I’m taking his word on this one) a scholarship is non-taxable when you use it to pay qualified expenses. In this case the only qualified expense was paying tuition and other applicable fees to my alma mater, Arizona State University. It wouldn’t normally be hard to prove that I paid for my tuition with this scholarship, but the issue is that I also took out a student loan and ASU applied them directly toward my tuition – automatically – so I never even got a bill for my tuition. Because they did that they form they sent me for taxes for the year showed a big fat “0” for education expenses. No ‘qualified’ education expenses, no non-taxable scholarship. Great.

So that’s the situation. It’s all a bit complicated, what with two major mistakes having been made, but it’s nearly resolved at this point and frankly I’ll be glad when it’s all over with.

Here’s what I’ve learned from this whole ordeal (college students pay especially close attention):

If you are able to qualify for a scholarship that’s fantastic, but make sure you structure your financial aid properly. Your school should do this for you automatically if it’s a scholarship through the school, but if it’s a private scholarship you’re expecting you need to plan ahead. Let your school know you’ll want a tuition bill instead of having your student loan (or grants) applied directly toward your tuition. Hopefully the financial aid department won’t have an issue with this. You NEED to pay for your tuition with the private scholarship first. If you still owe tuition after your scholarship is exhausted then use your grant money next (if you qualify for any) and then your student loan proceeds (in that order) to pay for the remainder.

If you are able to do this it should save you a headache further down the line.

Finally I’ve decided that with all of the changes to the tax law every single year I’m just not qualified to do my own taxes or use any sort of personal tax software (nor do I want to put in the time to study all the changes that might affect my family every single year). I’ll be using an accountant next year. Can anyone recommend a good one? 🙂