My DD has a scholarship that is more than QEE (Covers room & board) and it was easy to get through doing both of our taxes on TuboTax. Kiddie tax was automatically calculated. I paid the tax bill because it was far less than I would have paid for room & board. (I still have a lot of complaints about the tax code, though…)
Heads up - new tax forms with instructions are posted at IRS now. Amy one of you experts out there want to offer guidance on how to handle “extra” scholarship money (say, $5,000 that covers some of room and board plus $2,000 earned income)? Anyone?
What do you mean by “handle”? If the student is filing single and had no other income, the total AGI of $7,000 would be completely covered by the standard deduction.
@BelknapPoint What I meant was: previous posters had given some very specific guidance with the caveat to be careful because the new tax laws/forms could change things.
So now the new tax forms are out so I figured it was useful to ask those folks who may be looking at the new forms themselves for this issue, maybe those informed folks would offer updated advice.
Previous posters have mentioned a process that seems more complex than your post. But maybe not. I’ve no clue really. That is why I am posting.
Things can get complex when the kiddie tax comes into play (Form 8615), but that’s not an issue for you if the AGI is less than the standard deduction.
I would just like to know why a scholarship going to R&B is considered taxable – and at the estate/trust rate, no less. Why isn’t R&B necessary? Where is a student supposed to eat and sleep? And taxing it just defeats the point of a scholarship. It’s really outrageous, the more I think about it.
It’s one of the complexities of the tax code. I guess I’m thankful that we get scholarships and that it’s not all taxed.
I don’t agree about it being taxed the same as other unearned income of children.
I guess the kiddie tax was supposed to prevent parents sheltering assets in children’s accounts, and paying taxes on it at lower tax rates.
But scholarships enable especially lower income kids to go to college.
And I feel for those kids, if they get a full ride and have to come up with the money to pay the taxes.
My D had a taxable grant of a few thousand so her kiddie tax was only a few hundred dollars, we paid that for her.
This year with the higher standard deduction, she might not owe any tax.
But she has also earned more money from her job.
Don’t forget state taxes too. DD goesout of state and has pay state tax on her taxable portion of the scholarship.
My kids go to the closest instate public that has their major. One is over an hour away, and one two hours. They cannot commute.
I know kids in our area who commute 30-45 minutes to college. Usually they try to get their classes in on as few days as possible. But on bad weather days even they have to stay the night somewhere.
If you think owing taxes on grant or scholarship money is a bad deal, all you have to do is decline the money, and then you won’t owe the tax. Your complaining reminds me of the phrase “don’t look a gift horse in the mouth.”
Where is a student supposed to eat and sleep? The obvious, and easy, answer is “somewhere.” The point here is that if money for these expenses isn’t coming from a taxable scholarship, it’s probably coming from either student or parent earnings, which, you know, is taxable (just like a scholarship that pays for room and board). Its a matter of public policy.
The IRS abhors a free lunch and will tax it at every opportunity. Over the years some programs have escaped taxes like 529 plans and Olympic medals, but those are the exceptions and not the rule. It does seem especially unfair that they are taxing the scholarships at the kiddie tax rate when these are not parent assets or income. Just a few years ago they changed scholarships from earned income to unearned.
And now the kiddie tax is the trust rate…right?
Beginning this tax year, a child’s unearned income that is subject to the kiddie tax will be taxed using the estates and trusts rates. Previously, that income was taxed at the parent’s highest marginal rate. So, this change could be a good thing or a bad thing, depending on several factors, including what the parent’s highest marginal tax rate is and how much unearned income there is that is subject to the kiddie tax.
Could someone explain “kiddie tax” to me in two sentences or less?
Kiddie tax is tax based on the parental tax rate, assesed to kids on “unearned” income including taxable scholarships. The new tax rules use the “estate” tax rate instead of the parental tax rate. Does that help?
The intent of the “kiddie tax” is to reduce the incentive for parents to take their money and invest it in the name of a child which would presumably decrease the taxes owed on any investment earnings because without the kiddie tax those earnings would be taxed at the child’s lower tax rates. Note that under this scheme, the parent(s) would not be relinquishing control or actual ownership of the assets and would move the assets out of the child’s name and back to the parent(s) at the appropriate time. Until this year, the kiddie tax made a child’s unearned income above $2,100 taxable at the parent’s highest marginal rate, thereby making it less appealing to move parent investment assets to a child’s name. Starting this year, as already mentioned, a child’s unearned income will be taxed under the estates and trusts rates instead of the parent’s highest marginal rate. Sorry that this is longer than two sentences.
Regarding not looking a gift horse in the mouth – sorry, I stand by my own opinion that taxing a scholarship defeats the point of a scholarship. That’ s my opinion and my view.
Well then you should decline the scholarship and not taken on the hassle of paying the extra tax liability.
In many cases, the taxes owed on scholarships for room and board only are not very high…and sometimes there is no tax payment liability at all for the student.
So…before you cast stones…understand what the tax consequences are. If a student is getting a large sum…say $20,000 in scholarships for room and board…their tax liability will be FAR FAR less than the amount of the scholarship amount. Far less.
So…as noted, you could decline a $20,000 scholarship…or pay the taxes on that award.
Frankly it would be Penny wise and pound foolish to decline the award simply because your kid is taxed on part of it.
You could consider this part of the financial contribution your student makes toward college costs.
I do think it unfair to tax scholarship, but there are a lot of unfair things about the tax code and no one is in a 100% tax bracket so it is always better to take the scholarship money even if it is taxed.
My daughter only paid $300-500 in taxes on her scholarships for room and board (about $10-13k per year) and it would have been $0 with the $12k standard deduction.