Taxable as income?

Mikeandcris

Mikeandcris

Parents of 2014 Grad and F-15 Pilot
10-Year Member
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I saw a note in a college forum that certain portions of a scholarship are considered income and thus taxable. (The post said any money towards room and board may be considered fair game by the IRS.) I searched "tax" and "taxable" on this and the USNA forum but found no reference to tax. Is some or any of the $414,000 value of an education at the Academy considered taxable by the IRS? My guess is no, but I'm not a tax expert.
 
I believe the keywords are "...valued at $414,000..." We never see that $414,000 in our pockets. I believe that is referring to how much it would cost if we had to pay for room and board, food, education, and so forth. So I would assume that it isn't taxable since we never actually see that money. That being said, taxes are taken out of our $927 monthly paycheck as well as any other debt we may have (eg. loan, uniforms, computer).
 
The ONLY part of an academy education that you have to worry about taxes, is the "PAYCHECK" that you receive each month. You will get a monthly statement that shows the amount of money you made that month and year to date, and the "Taxable" amount of that. At the end of the year, that is what you pay taxes on. The actual education, room, board, and other value; you do not pay taxes towards.

Also, for what it's worth, the 1st year you go to the academy, "Technically" your parents can claim you as a dependent for that year, but usually what the military is paying for the cadet is more than what the parents provided, so the majority of parents realize that it's easiest to not claim their child that year. And after that 1st year, parents can't claim their cadet EVER again. Just so you know. But you will learn all about the parent's part during orientation and such. But for the cadet, again, the only "Taxes" you have to worry about, is the ACTUAL PAYCHECK you make each month. later... mike...
 
This is how the IRS sees it:
Scholarships - not taxable if they are used for tuition, fees, books and supplies.
Scholarships - applied toward room and board and living expenses are taxable.

Years ago the IRS ruled that the education received at a US Service Academy is a "scholarship" and hence, is not taxable.
Cadets and Midshipmen receive a salary. Some of that is deducted to reimburse the service academy for living expenses, uniforms and other needs; however, the entire portion is taxable income.

Dependency rules are a separate issue. There are several tests that need to be met to determine dependency.
Two of those at issue are the residency test - Did your child live with you for more than 1/2 of the year?
and the support test - Did your child provide over half his support in the year?

If your child reports to the Academy before July 1 then the residency test fails and you can't claim as a dependent.
The support test is trickier and the guidance from one Academy states that the child is providing his own support which include the tuition scholarship plus the income. Most of the time this test would fail as well.

Bottom line is only the Cadet pay is taxable income and usually the parent cannot claim their child as a dependent during the year they report. Parents who will have a child report to a service academy may be prudent and consult a reliable tax adviser and consider adjusting their W-4.
 
How about this line of thinking?

I would contend that until acceptance day they were at summer camp; and still supported by me.

As to the support test, his portion of the mortgage, property taxes, food, insurance, utilities, automobile usage, education (from Jan 1 to acceptance day) and various other expenses, adds up quickly to way more than the Academy provides.

What do you think? Am I on a good track?
 
I would contend that until acceptance day they were at summer camp; and still supported by me.
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Point #1 - Contend all you want but they are actually active duty military and not supported by you. You are not paying any of their expenses - food, clothing, housing.
You can duke it out with the IRS and probably lose.

Point #2 - Perhaps - if they were in a very expensive private school or college and you paid for it. Remember - their total dollar "support" at the academy includes their "scholarship" driving up their total cost of living.

As far as I know, USMA is the only academy that does this and early in the year send out a note to all parents regarding their plebes and support. They total the total cost of "support" while they are at the academy - tuition, books, uniforms, fees, room, board and salary. it adds up to a hefty number.

This is a portion of that memo:
Your parent(s)/guardian(s) must have contributed more than half of your support for the year in order to claim you as an income tax exemption “More than half the support” refers to dollar value, and not to the length of time support was furnished. Your parent or guardian may properly include the cost of board, clothing, lodging, medical and dental care, education, property and furniture, insurance, etc., they furnished you when they calculated their level of support. If you lived at home during the first six months of 2008, your parent or guardian may include a proportionate amount of the family food bill, utilities, rent or house payments, interest, taxes, etc., as part of your support. If you attended college, prep school, or high school prior to entering the Military Academy, your parents may also include the amount they paid for tuition, books, school supplies, and transportation to and from school as parental support.

In determining the value of support furnished from sources other than your parents, you must include both taxed and untaxed support amounts. This simply means that the portion of your taxable pay spent on your own support must be included, and in addition, the support provided by the Army in the form of food, lodging, education and other services must also be included. Even though the value of Army support is not taxed as income, the value must be considered when determining who provided more than half of your support. The following chart indicates values of support furnished by yourself and by the Army.
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Last year that total came to nearly $40,000. You would have had to spend over $40,000 on your cadet from Jan-June.

The biggest mistake people make is in thinking the support test refers to time - as in over 1/2 the year. It doesn't refer to time but refers instead to dollar amount.
 
Fyterpilot22 said:
I believe the keywords are "...valued at $414,000..." We never see that $414,000 in our pockets. I believe that is referring to how much it would cost if we had to pay for room and board, food, education, and so forth.
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I believe that "$414k" amount is derived by taking the Academy's total budget and dividing by the number of cadets.
 
Last year I spoke to a cadet dad at our parents' club meeting about this...he works for the IRS. He said you can put whatever you want on your return...it's yours. If you get audited, you better be able to back it all up with proof...or you will pay the piper. Most parents don't claim the cadets/mids the first year. However, there are some who earn quite a bit of money and have given support way in excess of $40K...as long as you can back up your return, you are in good shape.
 
Thanks Just-A-Mom. This is great information.

I just want to be perfectly clear – The test has to do with money NOT time.

If it is just about the money at least we can do some math and there is some hope.

For instance I could add in Thanksgiving and Christmas break – what do you think? (an additional 24 days of household expenses).

If it is about time, EVERYONE is six days short - so it is a moot point and NOBODY can take the deduction.

Am I missing something here?
 
Yes, it's about the $$$ of support. I don't think you can add in Thanksgiving and Christmas, since they are technically emancipated.

I recall, a few years ago Navy's I-Day was around the 4th of July which meant they were home for over half the year. They have made it earlier now.
Of course you will want to consult a tax advisor, which I am admittedly not. (disclaimer)
 
Just_A_Mom said:
I recall, a few years ago Navy's I-Day was around the 4th of July which meant they were home for over half the year. They have made it earlier now.
Of course you will want to consult a tax advisor, which I am admittedly not. (disclaimer)
Click to expand...

Want to thank you guys for bringing up this thread - this is all very interesting and I never would have even considered any of this!

My son has an LOA for Navy and was told that I day for next summer was July 2nd, which I guess would technically be over half the year. But it sounds more like that's not the criteria.
 
marciemi said:
Want to thank you guys for bringing up this thread - this is all very interesting and I never would have even considered any of this!

My son has an LOA for Navy and was told that I day for next summer was July 2nd, which I guess would technically be over half the year. But it sounds more like that's not the criteria.
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It's part of the criteria - the "dependent test" is not just support, there are 4 parts to it: relationship, age, residency, and support.

Consult a qualified tax attorney, do NOT rely on any advice you get in this thread.
 
So....it depends?

It seems clear that only the monthly stipend a cadet receives is taxable..but it would seem that expenses such as uniforms, etc would be deductible. As to whether or not to claim a C4C as a dependent during his/her year of admission sounds like "it depends."
 
Expenses such as uniforms are not tax deductible, they are part of the "support" equation that cadets provide for themselves.

You have to do the calculations - if you child lived away from home from Jan-June (or part of it) you add up how much you spent on their "support". This includes and tuition, room and board you paid. If they lived at home and went to public school you add up their share of housing, board and other expenses you paid on their behalf.

The other side of the equation is how many dollars they supported themselves with after they arrived at the academy.
USMA gave plebe parents that amount which I posted above. it was nearly $40,000 and included their salary, salary advance, room, board and tuition.

Regardless, if you choose to claim your cadet/mid as a dependent - make sure they know. They will most likely do their own taxes at the academy (they are adults now) and you want to be on the same page on this.
 
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