College R.A.s aren't taxed on room, board

03/23/2009

QUESTION:
Dear Joe,

My daughter has been a resident adviser during her sophomore and junior college years. This year, apparently, (because) two semesters of being an R.A. show up for tax year 2008, our accountant said she would have to file and pay taxes on approximately $9,000 -- free room and board for being an R.A.-- plus $2,400 of earned income.

My two other college students qualify for Pell Grants for 2009-2010 school year. But will this large amount of taxed money affect her (Free Application for Federal Student Aid) status? Although I read College Guru often, I had no idea she would owe all (these taxes). Your thoughts on this? Thank you.

-- Joan

ANSWER:
Dear Joan,

I think you should go back to your accountant and have him or her double-check how the tax law applies to your daughter's situation. Campus resident advisers generally do not have to pay income tax on these benefits. Housing is excluded when residing in the dorm is a condition of being an R.A., and meals are excluded when furnished by the college for the convenience of the college. Refer your accountant to IRS Publication 525.

I am assuming that the value of room and board was not reported by the college to your daughter on a Form W-2 or 1099. If it was then something else must be going on, and you should contact the school's bursar and ask about it.

Your daughter's 2009-10 federal financial aid, or FAFSA, application must report untaxed income, including the room-and-board waiver, as student income, and this can reduce her eligibility for need-based federal aid in the coming school year. You should speak directly to the school's financial aid office about this potential problem. They may be able to minimize the impact by applying any aid reduction to "self-help" types of aid such as student loans and leaving "gift aid," such as grants, intact.

Fortunately for those using 529 savings plans or Coverdell education savings accounts, or ESAs, tax-free distributions from a 529 plan or ESA owned by the parent or student do not have to be reported on the FAFSA as untaxed income. Because financial-aid eligibility is reduced by as much as one-half of reportable income, this is a substantial benefit.

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