Since last spring, Kevin Doerksen of the Internal Revenue Service has been submitting very informative articles to us as a part of a new IRS education program. As far as I am concerned, Kevin is "The Tax Man." I thought it would be good at this season of the new year to devote some space to tax issues to help us both personally and professionaly. If you like, contact Kevin. He is anxious to assist us. (Editor's Note)
We Have a Friend in the IRS...The Tax Man
Submitted by Kevin Doerksen
Internal Revenue Service
Suite 5000, Stop 1022
271 W. 3rd
Wichita, KS 67202
2003 IRS E-FILE - Almost 47 million Americans chose IRS e-file options in 2002 – 16 percent more than the year before. The IRS expects about 54 million e-filers in 2003, as more and more taxpayers who file through a computer or a telephone look for these benefits:
- Faster refunds: Direct Deposit can speed refunds to e-filers in as few as 10 days. The average e-file refund is issued in 14 days.
- More accurate returns: IRS computers quickly and automatically check for errors or other missing information, making e-filed returns more accurate and reducing the chance of getting an error letter from the IRS.
- Quick electronic confirmation: Computer e-filers receive an acknowledgment that the IRS has received their returns. Callers using TeleFile receive a confirmation number while they’re still on the phone, letting them know that the TeleFile system has accepted their return.
- Free Internet Filing: For the 2003 filing season, at least 60 percent (78 million) of individual taxpayers will be eligible for IRS Free File. Tax software companies and the federal government are teaming up to offer free online tax preparation and electronic filing services to eligible taxpayers. Free services are accessible through irs.gov. Eligibility requirements will be on www.irs.gov beginning in mid-January 2003.
- Using a Personal Computer: Taxpayers with a computer, a modem or Internet access and tax preparation software can e-file their tax returns from home any time, day or night. To do so, a taxpayer sends a completed, electronic tax return to a transmitter. The transmitter converts the file to an IRS-approved format and then sends the converted return file to the IRS. Within 48 hours, the IRS notifies the taxpayer through the transmitter whether or not the return is accepted.
- E-Filing By Phone: For those who are eligible, TeleFile, the IRS file-by-phone system, is the easiest way to file a return. Potentially eligible TeleFile users get a special tax package from the IRS that invites them to file their taxes quickly and easily by phone. Instead of tax forms, the package has a worksheet that, when completed, becomes the taxpayer’s TeleFile Tax Record. This record includes a Customer Service Number that serves as an electronic signature. The package also contains a checklist the taxpayer uses to ensure eligibility. Then, all the taxpayer does is fill out the worksheet, call the toll-free number and follow the step-by-step instructions.
- Direct Deposit: One electronic transaction that is available to both e-filers and those filing a traditional paper tax return is direct deposit. About 40 percent of all refunds were directly deposited in 2002, representing half of all refund dollars. Choosing direct deposit is easy; paper return filers just enter their account number and routing number in the boxes provided on Form 1040, 1040A or 1040EZ. (There is an illustration explaining how to choose direct deposit in the tax return instructions.) Those who choose direct deposit will get their refunds a week quicker than those who receive a paper check. Also, a refund that is directly deposited in a savings or checking account cannot be stolen or lost in the mail.
HOW TO HANDLE SCHOLARSHIPS, FELLOWSHIPS, AND GRANTS
Scholarship: generally an amount paid for the benefit of a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or graduate.
Fellowship: generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.
A scholarship or fellowship is tax free only if:
- You are a candidate for a degree at an educational institution, and
- The grant is a qualified scholarship or fellowship.
Candidate for a degree: “candidate for a degree” means a student (full or part-time) who:
- Attends a primary or secondary school or is pursuing a degree at a college or university, or
- Attends 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.
Educational institution: an educational institution maintains a regular faculty and curriculum and has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
Qualified scholarship or fellowship: a qualified scholarship or fellowship is any amount you receive as a scholarship or fellowship grant that is used under the terms of the grant for:
- Tuition and fees required to enroll in, or to attend, an educational institution, or
- Fees, books, supplies, and equipment that are required for the courses at the educational institution. These items must be required of all students in your course of instruction.
Your scholarship or fellowship grant can still qualify as tax free even if the terms do not provide that it be used only for tuition and course-related expenses. However, if the terms of the grant require its use for other purposes, such as room and board, or specify that the grant cannot be used for tuition or course-related expenses, the amounts received under the grant are not tax free.
Athletic scholarships: athletic scholarships are tax-free if they meet the requirements discussed above.
Qualified education expenses reduced: education credits, certain deductions, and exclusions from income are based on your qualified education expenses. You must reduce your qualified education expenses by your tax-free qualified scholarship or fellowship grant, tax-free veterans’ benefits, and any other tax-free education benefits. Use your reduced qualified expenses to determine any of the following amounts that apply to you.
- Hope credit.
- Lifetime learning credit.
- Interest deduction on student loans.
TAX TREATMENT OF SCHOLARSHIP AND FELLOWSHIP PAYMENTS
Degree candidate: Payment for tuition is tax free. Payment for fees, books, supplies, and equipment are tax free if required of all students in the course. Payment for room, board and travel are taxable. Payment for teaching, research services, and other services are taxable but do not include amounts received under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.
Non-degree candidate: Payment for tuition, fees, books, supplies, equipment, room, board, travel, teaching, research services and other services are all taxable.
TAX TREATMENT OF GRANTS
Fulbright grants: a Fulbright grant is generally treated as any other scholarship or fellowship in figuring how much of the grant is tax-free. If you receive a Fulbright grant for lecturing or teaching, it is payment for services and is taxable.
Pell Grants and other Title IV need-based education grants: these grants are tax-free if they are used for qualifying tuition and course-related expenses during the grant period.