Many Senior Military Officers and NCOs have GI Bill benefits they don't need for themselves. Fortunately, in the case of the Post 9/11 GI Bill, they have the option of transferring the benefits to their spouse or children. The idea behind this benefit was to increase retention as the transfer can only occur while on Active Duty and there normally is a service commitment associated with the transfer.
Once the benefits have been transferred they can be moved around between the servicemember's spouse and children. That is a good thing, because if you're careless you could end up with an unexpected tax bill. That has to do with the taxation of scholarships. Scholarships are tax-free if they are used for qualified education expenses. The definition of qualified education benefits changes depending upon which part of the tax code you're talking about. In this case, it pretty much means tuition and fees.
GI Bill and Scholarships
If your child or spouse goes to an in-state school, GI Bill will pay for 100% of tuition and fees. If that student also receives a scholarship, there won't be any remaining qualified education expenses upon which to use the scholarship funds. Those funds will be taxable income to the child. Depending on how big the scholarship is and how much other income there is, the student may owe taxes on the scholarship proceeds. If there is only one person going to school and eligible for GI Bill benefits, there isn't much you can do about it. It's pretty much a first-world problem. Pay the taxes, if you owe them, and be thankful the education was essentially free.
On the other hand, if you have more than one person going to school and eligible for GI Bill benefits, you might be able to eliminate or reduce potential tax liability on scholarship proceeds. Here are some scenarios that you might run into. We'll assume there are two children, that both will attend college and the scenario won't change significantly over the time in college.
- Both children will attend an in-state college. The daughter will receive scholarship and the son will not. In this scenario, you would want to use GI Bill benefits on the son as the scholarship GI Bill combo would make the scholarship proceeds taxable income for the daughter.
- Both children will attend an in-state college. Both children will receive scholarships. In this case, GI bill benefits should be used on the child with the smaller amount of other income (from a job, as an example) or the one with the smaller total amount of scholarship proceeds.
- One child will attend an in-state college and one will go out of state or to a private school and both will receive scholarships. In this case, the GI Bill should be used for the out of state or private school as the GI Bill will not pay the full amount of tuition and fees (normally) and the scholarship proceeds will not be taxable income.
There are probably some other combinations. The point is to make sure you consider the taxation of scholarships when combined with GI Bill benefits.
Tuition and Fees Only Scholarships
One other situation you'll want to be aware of, is the case where the scholarship can only be used for qualified tuition and fees. While these scholarships are not common, they are out there. In this case, GI Bill will be "second to pay" and will pay the tuition and fees not covered by the scholarships. But, the days/months of GI Bill use will still be counted as if the GI Bill paid all the qualified tuition and fees. You'll leave money on the table. If a student receives this type of scholarship, it might be a good semester to not use the GI Bill
Military and Veterans Benefits
The GI Bill is just one of the many unique financial benefits available to military members. If you're going to work with a financial advisor, we think you should work with one that to which you don't have to explain what the GI Bill is. If you'd like to chat about financial advice tailored for military members, no matter where you are in your career, and veterans, give us a call.
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