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There are some grants that are tax-free. Unless the tax code has changed in last three years, I respectfully belive Ira is very wrong, and most scholarships are reportable as income, including those from pvt. foundations. Since you have conflicting opinions here, check it outwith a tax accountant or IRS regs. (And expect to get a 1099 next year).

Scholarship income seemed to have become an emphasis item with IRS while my kids were in college. In 1999 or 2000, in sophmore or junior year of my oldest, he began getting 1099's from the college showing scholarship income. Colleges are now required to report these to IRS. This is reportable income. One smaller foundation gave him $2,000 per year directly, and we never did get 1099's from them...we only got them from the college.

There was also a little write up I got from a tax accountant in 1998 or 99, saying computers were not a deductible college supplies expense unless specifically required for a course; nor were books that could be bought at sources other than at the school.

As I said, in his first year I took his scholarship amount, subtracted out tuition and lab fees, etc, and reported the net as income. Next year, H & R Block said it was wrong. He could report all of the amount on the 1099 as income, and then claim the Hope credit for amount spent on tuition. I even called an IRS friend in Fresno, and he confirmed this as legitimate.

When you complete the FAFSA, it will ask how much you contributed to retirement plans in that tax year...BUT FAFSA does not ask how much you have in your retirement accounts; you do not include retirement accounts in your net assets. You may not get an EFC break in year one, but you will in forthcoming years if you have more of your assessts in 401's, IRA's, etc.

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