My 5-year old received a 1099. Now what?

Q: My five-year old received a full scholarship to attend a private (for-profit) elementary school in 2008, which included a pre-kindergarten summer day-camp, a uniform allowance, breakfast and lunch, field trip fees, and after-care in the school's day care section. The school sent us a huge 1099 for the amount of the tuition as well as all the extras. It was issued in my child's name and with his social security number. I'm a single parent making less than $20,000.00 per year. What do I do?

A: The first thing I would suggest is to contact the school and ask them to issue a corrected 1099. The amount of the tuition, the uniform allowance, and the field trip fees are not taxable, since they are a scholarship under IRS rules and not taxable income to the grantee (see IRS Publication 970 and IRS Publication 525 ). It is possible that the remaining amount (food and day care) may be taxable, but that may also be characterized as a charitable gift, which would not be taxable to you. If the school is willing to issue a corrected 1099, you should ask them to place the corrected 1099 in your name and social security number, and not your child's.

If the 1099 is reissued by the school as anything but zero, and it is still in your child's name and under his social security number, or if they refuse to issue a corrected 1099, you will have to file a separate tax return for your child, and you will be responsible for paying any tax that is assessed. If you file a separate return for your child, you may sign your child's name to the return and add your signature, per these instructions from IRS Publication 929: If the child cannot sign his or her return, a parent or guardian can sign the child's name in the space provided at the bottom of the tax return. Then, he or she should add: “By (signature), parent (or guardian) for minor child.”

If the school changes the 1099 to place the imputed income in your own social security number, you may include the 1099 with your tax return for 2008. Subtract the non-taxable scholarship income, and report the remaining (taxable) income as follows:

Form 1040EZ. If you file Form 1040EZ, report the taxable amount on line 1. If the taxable amount was not reported on Form W-2, enter “SCH” and the taxable amount in the space to the left of line 1.

Form 1040A. If you file Form 1040A, report the taxable amount on line 7. If the taxable amount was not reported on Form W-2, enter “SCH” and the taxable amount in the space to the left of line 7.

Form 1040. If you file Form 1040, report the taxable amount on line 7. If the taxable amount was not reported on Form W-2, enter “SCH” and the taxable amount on the dotted line next to line 7." from IRS Publication 970, Tax Benefits for Education

Do not ignore the child's 1099, even if all of the income reported is from the scholarship and nontaxable. Whenever a 1099 is issued, the IRS will receive a copy. If you cannot convince the child's school to correct the 1099, you will have to address it in a tax return, either yours (if it is issued in your name) or your child's (if it remains in his). If your child continues on a scholarship basis at the same school, you may expect to address this issue in future years.