DadofTeen, this was not directed at you but at the poster who suggested that in situations like this, the income not be reported.
Kiddie Tax:
https://ttlc.intuit.com/questions/1901223-what-is-the-kiddie-tax-and-do-i-have-to-pay-it
If your child qualifies, you can file File 8814 as an attachment to your Form 1040:
Form 8814: http://www.irs.gov/pub/irs-pdf/f8814.pdf
It’s possible your child does not qualify because his unearned income did not consist solely of interest and dividend income. In which case, you’d have to file a Form 1040 for your child and attach Form 8615 (Tax for Certain Children with Unearned Income):
http://www.irs.gov/pub/irs-pdf/f8615.pdf
The only real issue: is prize money “unearned income” and it would appear from others’ experience that it is considered unearned income.
It’s income. It’s earned income. That isn’t an unresolved issue. It is earned income, not that it matters, it is income. Unearned income is income from investments such as stocks that pay dividends or bonds that pay interest. Unearned income is also called passive income. The “kiddie tax” has nothing to do with income earned from music competitions. Winning an award has nothing to do with transferring assets to a dependent child who is in a lower tax bracket and that is what the kiddie tax is designed to prevent.
Taxable scholarships don’t have anything to do with transferring assets either yet starting with 2012 the instructions for form 8615 were changed to include them.
I don’t think that criteria is a good way to judge whether income is unearned and/or subject to the kiddie tax.
Earned income as defined later is pretty restrictive:
It goes on to talk about income from a business and other things but competing in a contest wouldn’t seem to be a payment received for personal services performed.
I didn’t know paying tax is voluntary. You mean I’ve been dubbed all these years?
Yeah, the “not reported on W-2” is what got us for our daughter’s summer stipend. Annoying, but a fact. It was considered “unearned”.
@ 43,
I haven’t read the whole thread but I thought I read where the OP’s son or daughter won an award in a music competition. That is not a scholarship for qualified education expenses it was an award. And that award was “earned” by winning the competition. Thus, the comments about how this award was like a scholarship side tracked the issues of (1) was it taxable income or not and (2) is it earned income or not.
But, you can see why I avoid taxation issues if possible. The worst thing on earth is when one’s neighbors find out you are accountant and assume that means you are a tax expert. Not always. Tax experts are the people who live and breath it 365 and that surely is not me so don’t listen to me :-).
The only reason I brought up the kiddie tax was to clarify some of the previous discussions from someone who did bring it up. You won’t read me saying this situation applies to the kiddie tax, in fact, I said the opposite, winning an award (that is not a scholarship), it is cash in hand, has nothing to do with the kiddie tax. I was attempting to clarify that.
As far as I can tell, from what I recall reading, this is not a scholarship. It was a money received by winning a competition that money can be used be the recipient anyone way he/she sees fit. If it were a scholarship, that would change much of the discussion about what to do with it.
Alas, the Internal Revenue Code disagrees. The relevant Code section is 911(d)(2). If the income wouldn’t qualify for the Foreign Earned Income Exclusion, it’s subject to Kiddie Tax. (That is, the Code section defining kiddie taxable income points to the FEIE definition.)
Unfortunately, the common usage of the word “earned” doesn’t necessarily bear any relationship to the tax usage of that word.
IRS Code section D2 is excerpted below:
(d) Definitions and special rules
For purposes of this section—
(1) Qualified individual
The term “qualified individual” means an individual whose tax home is in a foreign country and who is—
(A)a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B)a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.
(2) Earned income
(A) In general
The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.
Folks, believe what you want. For my $.02, winning an award from a music competition has absolutely nothing to do with the kiddie tax. It is earned income in the sense that the OP’s child “won” the award in the competition. The child earned the award by winning.
But even if the income was unearned, I don’t think it has anything to do with the kiddie tax and heck yes I could be wrong; I surely am not a federal tax expert I run as fast as my legs will take me away from tax stuff.
To be clear, the “kiddie tax” is an issue created when a taxpayer transfers assets to a dependent so that the income from those assets will be taxed in a lower marginal tax rate then the transferee is in. Did the OP TF assets to a dependent in this case?
No.
The kiddie tax is not applicable. But believe what you want.
I didn’t say that winning a competition is the same as taxable scholarships. I used taxable scholarships as a counterpoint to the argument that because a source of income doesn’t represent the original purpose of the kiddie tax, that it’s not subject to the kiddie tax.
I don’t see winning a competition as being payment for services rendered and thus I don’t think it’s earned income. Using the common usage of the meaning of the word earned isn’t the way to figure out a tax question.
The OP has said family income is high enough that they won’t qualify for financial aid. So the OP likely can afford to get the opinion of a tax pro on this and that would be a good idea.
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I disagree that all scholarship money is income or taxable. Only that which is in excess of QEE is taxable unearned income. If a scholarship is used for QEE it is never income and never described as income by the IRS. A scholarship in excess of QEE becomes unearned income by definition. In the case of a prize, if the sponsor sets it up as a scholarship, it may never become income if used for QEE.<<<
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Disagree all you want, but you are still utterly wrong! Read the IRS forms with closer attention! You are confusing both sides of the ledger by mixing up the issues.
Not all taxable income creates a tax liability.
Never defined as income until it is used for costs other than tuition, fees.
OP, if I were you and my child were to continue to receive prizes, I would get some good tax advice from a CPA because this appears to be an ongoing matter. I’m sure the CPAs here can provide better information. But, if I were the parent, these are the salient issues:
(1) Is it income - unquestionably prizes are considered income
http://www.irs.gov/publications/p525/ar02.html
(2) Is it “earned income” or “unearned income” – both of these terms carry significant impact on treatment
– your answer depends on your facts, but it would appear that there is disagreement
– there are analogies to scholarships, academic competitions, Nobel prizes – which one applies to your kid, only you and your advisor can decide given the facts. His prizes don’t look like typical scholarships, more like awards for competition he entered. The fact that they paid his expenses to attend makes it even clearer.
– whether income is “earned income” has other impacts to taxpayer (kid), such as allowing kid to open an IRA, etc.
(3) Does the income have to be reported - $10k is very near the threshold for filing a Federal tax return
http://www.efile.com/tax/do-i-need-to-file-a-tax-return/
https://ttlc.intuit.com/questions/1901490-do-i-need-to-file-a-2014-tax-return-with-the-irs
(4) Does it matter that no Form 1099 was issued - no, it is reportable income
(5) If the kid has to report the income - what form does he or you file
– again, rely on your tax advisor: is it your Form 1040 with Form 8615 or the kid’s Form 1040 with Form 8814
– you’ll note that regardless of which form you file, the kid’s tax rate will be determined by whether “kiddie tax” rules apply
(6) Does the kid owe taxes and at whose tax rates
– depends on whether earnings falls within “kiddie tax” rules, in which case it is taxed at your marginal rates
– if earnings do not fall within “kiddie tax” rules, then kid has access to standard deduction but NOT a personal exemption if kid is still your dependent (test = "support:)
And, don’t neglect your state income tax requirements.
Trust me, I am getting a CPA.
That’s like saying AMT only comes into play if you’re a rich person taking advantage of tax shelters, so you shouldn’t be subject to AMT if dependency exemptions are the only thing triggering AMT. That may have been the original long-ago intent, but it’s nowhere in the Internal Revenue Code. And for better or for worse, the IRC is what you’re stuck with.
If anyone wants to take the position that some chunk of income is “earned” enough to avoid Kiddie Tax, but not sufficiently “earned” to trigger SE tax, you might consider filing a Form 8275 with the kid’s return laying out the statutory authority for doing so. Since the relevant Code sections are non-identical (no matter how far you follow them down, they don’t point to the same Code section or identical language across Code sections), theoretically that argument could be made, the same as you theoretically could make the argument that income is “active” enough to escape NIIT but insufficiently “active” to trigger SE tax. The 8275 lays out the logic of your argument in advance, and will not trigger an audit.
Adding this here (though it’s not OP’s situation), because it is fairly clear which portions of “Scholarships, Fellowship Grants and Other Grants” are included in gross income:
[QUOTE=""]
Never defined as income until it is used for costs other than tuition, fees.
[/QUOTE]
http://www.irs.gov/taxtopics/tc421.html<<<
This is taking the form of a “dialogue de sounds”. The tax free status is based on the availability of QEE that offset the income.
http://apps.irs.gov/app/vita/content/globalmedia/teacher/tax_treatment_scholarship_4012.pdf
I am looking at the entry in Line 1 which should correspond to the entry for scholarship reportable income on a 1098. You are looking at the QEE being larger than the income to declare it tax free. It is essentially the same thing --in that case.
Consider the possible MULTIPLE 1098 and scholarship income reporting to understand why it is important to add up the pluses and minuses. I dealt with this issue for six years.
Nope, I’m looking at the definition of gross income. Scholarships are EXCLUDED from gross income in the citation you provided. They only become income if not used for QEE.
Income is not reported on Form 1098. If it is income, it’s reported on a 1099 (interest, misc. payments, dividends, etc). Form 1098 reports transactions that may or may not be able to be deductible or allow a credit, like mortgage interest – or scholarships. Form 1098 are used for information only to the taxpayer and the IRS doesn’t care whether you take those deductions or credits or not, but it most certainly does care if you don’t report 1099 income. As most people on CC will confirm, Form 1098-T are often not correct yet no one sends corrections to the IRS because the IRS doesn’t care what is on the 1098s.
There are many transactions where payments are made to a person and it is not income to the receiver - gifts, child support, employer matching on a 401k. It’s not that there is a deduction or offset to make these ‘not income’ it’s that they were never defined as income to begin with. Employer paid benefits, not income (until it is in excess of some amount, then it can become income). Same with scholarships. They aren’t income to begin with, but might become income if not used for tuition, fees, and books.
the “kiddie tax” is an issue created when a taxpayer transfers assets to a dependent so that the income from those assets will be taxed in a lower marginal tax rate then the transferee is in.
That’s like saying AMT only comes into play if you’re a rich person taking advantage of tax shelters, so you shouldn’t be subject to AMT if dependency exemptions are the only thing triggering AMT. That may have been the original long-ago intent, but it’s nowhere in the Internal Revenue Code. And for better or for worse, the IRC is what you’re stuck with.
@ #55,
No, it’s not. Your analogy does not make sense. The OP does not have to worry about the kiddie tax. The kiddie tax is a tax issue created when a taxpayer TF’s assets to a dependent to get the income from those assets taxed at a lower tax rate. That is exactly what I said the first two times. Winning an award from a music competition has nothing to do with the kiddie tax. I am not saying the child won’t have income tax consequences, he or she will, but that is not a kiddie tax. But, once again, believe what you want. I tried to help the Op by suggesting not going to a CPA when he or she can get tax advice from a regular accountant who specializes in taxation or an EA. You will get the same advice but pay more if you go to a CPA. But, if he or she wants a CPA got for it. Whoever brought up the kiddie tax sidetracked the conversation into irrelevant items. The OP’s situation has nothing to do with the kiddie tax. There was no TF of assets.