@SimpleLife
You summed up our scenario exactly! We haven’t filed yet, but we are planning on filing the way you did. We will be using the excess scholarship $$ to pay for the taxes.
If he works an REU this summer, we might file like Barfly next yr. If he makes enough $$ that it is more than 50% of his rent and food, he won’t have lived at home at all. We won’t have given him any money or provided any housing at all in almost 1 1/2 yrs.
FWIW, our situation is apparently very different from others on this forum, so I think no one should compare what your CPA said with what my CPA said. I believe it is not different interpretations but rather different facts. @SimpleLife, you feel you did the ethical thing, and based on your set of facts, you probably did. But I would never intentionally violate IRS rules and am confident that, based on our unique situation, the way we did our taxes was completely legal and ethical. (It also meant that we paid more, not less, in taxes than we would have had we claimed our son as our dependent. It did benefit our son, but he still paid a considerable amount in taxes). Now that I better understand the rules, I can see why others are being advised differently by their own CPAs. Different facts.
Oh, thanks so much for weighing in, @Mom2aphysicsgeek! So we’re NOT the only ones on the planet who filed/will file IAW the stupid letter of the law? I’m so glad! Hahaha. Misery loves company! 
It’s painful, isn’t it?
I haven’t decided yet whether or not I’ll help my son with his tax bill. For now, it has been paid out of my account. He’ll have to pay some portion of that back to me. He typically pays all of his own taxes out of his excess scholarships, like your son, but this year, his bill was so ridiculously high because my tax rate was so ridiculously high, because of some actions my employer took while emerging from bankruptcy. It hardly seems fair to have him pay the entire thing out of scholarships.
Yes, I think that’s the way to go for next year. If your son makes enough money to pay for more than 50% of his rent and food, then you can go the way Barfly went. I don’t know that living at home or not counts for much. As a student, I think our kids technically “live at home” IAW IRS regulations. Education is a temporary absence. But the part about not giving him any money and having him pay more than half his own way with his W-2 earnings should do the trick!
In hindsight, it would have been far cheaper for my son to pay for his own cell phone bill, car insurance, and clothes, than to pay his own tax bill. But still, it seems to me that, technically, in order to avoid paying his taxes at my rates, he would have had to pay for those things with W-2 wages, not taxable scholarship amounts. So, I think my family was stuck with what we got, unless we insist on looking at what the IRS surely must have fairly “intended” versus what the IRS wrote. How annoying.
Thanks again for chiming in!
I just saw your post #98, @annoyingdad. Thanks!
I had seen that thread. I’ve read a lot of these threads with great interest. Thanks, though, for pointing it out.
Yeah, the biggest hit my undergrad son took was due to the kiddie tax. He also took a fair-sized hit by being my dependent (though he didn’t have to depend on me at all). That son’s scholarships were taxed at my rate. That’s what hurt him the most.
My other son, a grad student with a few jobs and good enough W-2 earnings, along with a full-ride plus stipend in huge scholarships, did not get hit by the kiddie tax. THAT son got a pretty good tax refund!
I agree with you. It strikes me, too, that the tax code was written with the intent to be generous to families, and that most families will benefit by the rules as they are written. It is probably only a very small percentage of us who are hit by this really odd, almost cornering, tax code that has our fully-funded kids paying huge taxes on their scholarships.
It’s kind of because of that that I was so torn as to whether to file with the sort of thinking that has been discussed on these threads. (“I didn’t pay more than half his support and he didn’t live at home, so why should he be my dependent and pay at my rates?”) That sort of thinking seems much more fair and reasonable to me than the way the code is written! It almost makes me wonder if they inadvertently wrote it wrong, never intending for those of us in these shoes to pay the exorbitant rates our kids have to pay.
I will say, it sure has been great to have such a wonderfully smart, engaged, diverse sounding board for these matters here on CC! Thankful for that!
@SimpleLife, the most unfair part of this is that room and board is not considered a qualifying educational expense.
And of course the whole kiddie tax thing. If the child has to report the scholarship on his return, then why can’t he just pay the tax at his tax rate? It’s not like these kids are getting dividends from a trust fund, in these cases they earned the scholarships by getting good grades and scores.
Whoa, whoa, whoa! @Barfly. Yikes! I did not at all intend to say that you did anything unethical or illegal! I trust completely that you did what you think is best – AND LEGAL – for your family. You DO have a different situation in that your kids worked and earned wages. I am so sorry if it came across otherwise! I was NOT picking on you.
I DID disagree with some of the ways you justified your CPA’s conclusions – like, “In my opinion, if a kid is on a full academic scholarship that covers room and board, then that kid is not my dependent. That is our situation.” But, I just guessed and chalked that up to the fact that you rely on your CPA to do the work, so you didn’t need to fully read and digest the tax code like I did. Totally understandable. If I had a CPA, I wouldn’t have read it to that extent either.
Still, it’s important that people know that what seems fair and reasonable isn’t necessarily the way the tax code is written. And so, I wanted to highlight the differences between what we all wish we could do, and what is permitted by the tax code. I have absolutely no argument with your reasoning, @Barfly. And I agreed with much of what you said. It’s MY reasoning, too! (And I’m jealous that I couldn’t do what you could legally do.)
I have read a whole lot of threads on this subject in the past month. There are many people who say things that make total sense – if your son paid more than half his own support with scholarship money, then he’s not your dependent; your daughter shouldn’t have to pay the kiddie tax on taxable scholarships; if you didn’t actually pay more than half of your kids’ support, then he’s not your dependent; and so on. These things make total sense to me! To everybody, I would think! But, unfortunately, that’s not the way the tax code is written.
And so, I (possibly unfairly – I’m sorry) used your posts to illuminate those differences. Not to say that YOU were one of the ones filing unethically or illegally, but I can now see, in re-reading, that I may have come across that way.
What I really meant was this: There are lots of people on lots of these threads who seem to willy-nilly, and reasonably conclude that their kids aren’t their dependents or that their kids don’t have to pay the kiddie tax, etc. Because it doesn’t really make sense that they should have to. But, lots of these people are wrong. Their reasoning is good. But unfortunately, that’s not how the code is written. And I feel slightly jealous, and also disappointed in myself, that I stuck to the stupid, unreasonable, harsh rules as they were written, whereas others feel free to proceed on reason.
Two different things: (1) Your posts to illuminate my thoughts on IRS tax code. (2) Generalized “others” who didn’t feel as compelled as I did, because of my own annoying makeup, to follow the letter of the law rather than what seems reasonable.
Sorry, @Barfly, to inadvertently pick on you that way. You’re a legal, ethical Barfly, I’m sure. 
I haven’t filed for my student yet. I am in this same boat. One thing about a summer REU that complicated things for me this year is that it was not paid as W 2 or even 1099 wages. Our school paid it as a grant. So even more taxable scholarship money. It didn’t use to be so horrible when they paid at their own rate.
^ Yep. That’s what happened to my son, too. Big summer REU paid as scholarships. New rules to pay taxable scholarships at the parents’ rates. Disappointing.
@mommdc, Exactly! On both your points! It’s so absurd. And the whole way that taxable scholarships are conveniently “earned income” when it suits the IRS and “unearned income” when THAT suits the IRS! I totally agree with you.
Yeah, the kiddie tax thing starting in 2012 put a whammy on the taxable scholarship thing. It has nothing to do with families trying to hide large income producing investments in their kid’s names.
I disagree that R&B should be QEE. Sleep away college is a luxury that most students in this country don’t get. Most students commute to CCs, technical colleges or local 4-year publics. The tax code shouldn’t subsidize luxuries IMO, just enough to help kid’s get a college education. I kind of don’t like that large tuition amounts at expensive privates are QEE. Expensive privates are a luxury too.
ETA: The purposes for which taxable scholarships are considered earned income certainly suit the taxpayer, not the IRS, but the kiddie tax, you’re right.
EEK!! Serioulsy??? Does that mean that amt is paid at the kiddie tax rate as well? That is ridiculous! Poor ds. Wait until I tell him that he is going to have to bank all of his earnings to pay for the taxes.
Well, it depends on the school, I believe. It seems like different schools have different reporting methods for these kinds of things. I only know about my particular situation, but that is how it was done for us.
What I meant by my statement in post #109 is this:
Scholarships over an above the cost of tuition and fees (plus books) are essentially “earned income” for purposes of the 1040 and must be reported on line 7. One must pay taxes on them. Okay. That really is fair enough. (But I wouldn’t say it “suits the taxpayer.” It seems to suit the IRS. But, it’s understandable that taxes should be paid on that amount. Why do you say it suits the taxpayer?)
For purposes of the Support Test, taxable scholarships essentially become non-existent. They disappear into thin air and cannot be counted as a means of one’s support, even though they’re being used for that person’s support. Odd. Not black-and-white-fair or reasonable, imo.
And then, to add insult to injury, taxable scholarships suddenly become “unearned income” for the purpose of the Form 8615, which is used to compute the kiddie tax! Pretty clearly not fair or reasonable, in my estimation.
The scholarship amount not used for QEE is all at once earned income, non-existent, and then unearned income. That’s why I say that taxable scholarships seem to be treated in a way that suits the IRS at every turn. It’s very weird. I know this is hyperbole – it’s an exaggeration to make my point – but it’s like they’re picking on really good, really smart kids who happened to earn top scholarships and taking a disproportionate amount of their funds! I find it very odd.
Treating taxable scholarships/grants as earned income suits the taxpayer because the threshold for filing and the standard deduction are higher for earned income. They are earned income + $350 with a $6200 max. My state treats them as unearned income for these purposes so my son some years wasn’t required to file federal but was required to file state and always paid more state tax than federal.
^ Oh. I see your point. But then again, if they weren’t “earned income” at all, and were just free money (a girl can dream), then the taxpayer would be suited even more! Haha. But I get it.
Scholarship and grant money that exceeds QEE is taxable income. You agree with that, calling it “fair.” Here’s what you’re missing: in determining filing requirements and standard deductions, having earned income is better than having unearned income, and for these purposes taxable scholarships and grants are classified as earned income. This is much better for the taxpayer than having taxable scholarships and grants classified as unearned income. So in this case, the rule suits the taxpayer.
Yeah, if they weren’t earned income they’d be unearned income, not free money.
^ Right, @MiddKid86. I get your point. You and @annoyingdad were saying it suits the taxpayer in that it’s earned income as opposed to unearned income. I wasn’t thinking of the same comparison – earned to unearned.
Your thought: earned is better than unearned. I get it and I agree.
My thought: “non-existent money,” as in the support test, is even better (just tongue-in-cheek on this – a wild dream) and “earned income” for purposes of the kiddie tax is even better.
The frustrating part is that after calling it “earned income,” it then becomes whatever suits the IRS for tax collection purposes. Or so it seems.
I’m probably too late, but I have a question.
I’m on a full ride that covers room and board. My school aid covers all qualified expenses, but this is an outside, private “unmet needs” scholarship, which covers the room and board for me (about 10 grand) Why is this portion taxable? To what extent can I count this as a “gift”? Meaning, if someone gives me less than $14,000 in gift money, it’s untaxed. But if someone pays my institution just for room an board, it is taxable? I have a hard time believing this to be true.
Also, I read the definition of scholarship according to the US code, and it says “. However, the term does not include any amount provided by an individual to aid a relative, friend, or other individual in pursuing his studies where the grantor is motivated by family or philanthropic considerations.” My scholarship is funded by Bill Gates. Would this exempt me?
I contacted H&R Block. Bums. I contacted the IRS…they don’t know…