Hooray, your kid got a full ride! How do they pay their income taxes?

Parents Forum
41

@mom2collegekids, let’s break it down:

MIT scholarship above tuition plus NM scholarship- $7800 This was used to cover room and included in income. So,

$21,000-$7,800= $13,200 left

He paid MIT about $3000 for board. So,

$13,200-$3,000= $9,200 left

Last summer’s room, board, travel (including subway and airfare for coming home in the summer for a surprise visit for two days) was around $4000-5000. So,

$9,200-$4000/5000= $4200-5200

Let’s throw in some costs for books, clothing, supplies (his computer burned up, new phone, recording equipment for his recording studio) would be around $2000-3000

$4200/5200 - $2000/3000 = $3200-$1200

And then there are just plain incidentals-gifts for Christmas, other travel costs (flight home for Christmas), etc. $1000

What’s left is probably around $1000, give or take some hundreds.

So there we are left without budgeting the $4000 for taxes.

Yes, our income last year with disability and 401K was 74K, but we had been using a small 529 account to pay for his school. That was used up after the first two years, so we expected him to cover the costs last year. But, as was stated above, he got caught short on taxes, so we used our money to cover him. This year’s income for us will be 66K-no money in 401K this year.

When you live far away from home and in an expensive city, it’s amazing how fast an income can disappear; and, considering a good chunk of it was used to cover tuition, room, board, and travel, it’s easy to see how it can quickly go.

He’s learning to budget better.

And I’m not sure what you meant by “just for him.” We have two other children at home. We pay all educational costs out of pocket since we homeschool and we spend around $5000 a year on their education combined.

42

PS. And I am sure MIT will be expecting us/him to pay a good deal more for his last year of college than in previous years because of his 2014 income. We won’t get the f. aid package until June.

43

IRS Pub 501 page 15, qualifying child support test. No mention that any taxable part counts as support the student provided themselves.

http://www.irs.gov/pub/irs-pdf/p501.pdf

44

^^ Neither does it count as parental support! Again, it is not hard for students on full scholarships to adopt the dependent or the independent position. All it takes is to decide what it should be and balance the income and the support.

45

[QUOTE=""]
he made around 21-22K. <<<<<

[/QUOTE]

<<<
MIT scholarship above tuition plus NM scholarship- $7800 This was used to cover room and included in income. So,


[QUOTE=""]

[/QUOTE]

Your first statement sounded like he worked/earned $21-22k. Now I see that $7800 was from his scholarship.

I wasn’t questioning YOUR income or the issue of others you have to support. It was ambiguous about his earnings. If he had “made” (work earnings) of 21-22k in addition to all of his grants, then he should have had plenty to pay his own taxes. that’s what I meant by “all for him”.

Now, it’s clear that he had 21-22k to spend on room, board, books, personal expenses. That is still a lot more than most college kids. it’s hard to sympathize that he couldn’t live on $18k or less like most college students.

46

The difficulty with self-employment income is that many people (not just college students) don’t understand that they will be responsible for the taxes, and thus don’t set aside the money or keep track of expenses that can be related to that business or to another business the person has.

For example, sbjdorlo’s son spent money on recording equipment for his studio. If that is related to a business (even one that is losing money at this point in time), then it is a business expense that can be deducted from income on a Schedule C. If that is related to a hobby, then knowing that taxes were going to be due would have made him think twice before spending the money.

47

Yes, scholarships aren’t considered provided by the student or parent.

If you look at the support worksheet on page 16 of Pub 501, it is hard for a full scholarship student just like any student to claim not being a dependent. Education is a temporary absence and a share of the fair market rental value of the home, a share of utilities, a share of total food costs, a share of repairs count as parent support. Add in a share of health insurance if covered by a parent’s policy and other support and I think it’s unusual that a student can claim to be independent.

Any money earned by the student needs to be spent on the student’s support in order to be support the student provided themselves. Money earned and saved isn’t support the student provided themselves. That’s what lines 1 -5 of the worksheet are about.

http://www.irs.gov/pub/irs-pdf/p501.pdf

48

Exactly, happymom. He didn’t think. He didn’t even know his employer wasn’t taking taxes out. He learned. And his recording company isn’t a business yet as far as I know.

49

We were thankful we were prepared b/c of this forum for the tax bill our ds was hit with this yr. Regardless of whether or not Xiggi’s position is correct, for college freshman were dependents for the tax yr.

AttorneyMother, I wish I had had that info in April. Our understanding was if scholarships exceeded COA that you couldn’t claim AOTC.

We are currently paying quarterly taxes on the scholarship money, but if Xiggi is correct, then we don’t need to.

Sigh…I m thoroughly confused by this entire situation.

OP, to answer your question, we paid the taxes bc it was not an insignificant amt. it was essentially 1/3 of his scholarship exceeding QEE.

50

“I wish I had had that info in April.”

“And his recording company isn’t a business yet as far as I know.”

Both of these situations may merit further investigation and filing 1040x if you determine that the original filings were inaccurate. And check the fine print about quarterly taxes. It might not be necessary to do that provided X% of the total tax bill has been covered by withholding or Y% of last year’s tax bill was covered by date Z. In which case adjusting withholding might take care of it all.

51

@mom2aphysicsgeek ,

I second the notion of filing a Form 1040X, especially if you were not in full possession of the options during tax season.

File Form 1040X with a copy of the original return and an amended copy of Form 1040.

About the withholding “safe harbor”:

http://www.irs.gov/publications/p17/ch04.html

But the good news is that any withholding taken out of W-2 wages before the end of the calendar year “counts” as though it was withheld during the year (i.e., it takes care of the quarterly tax w/h obligations). IOW, the taxpayer can ask the employer to increase the w/h anytime during the year and that should be OK.

52

I’m sorry, but what is AOTC and QEE?

And would we/our son be best served by using a tax person in the future? We’ve always used Turbo Tax-very straight forward for our situation, but all of this is very confusing to me.

I assume my son doesn’t have a business because his music company is just on Soundcloud and none of his music is for sale.

53

AOTC = American Opportunity Tax Credit. QEE = qualified education expenses.

54

See chapter 2 of IRS Pub 970 for AOTC info:

http://www.irs.gov/pub/irs-pdf/p970.pdf

Tax software can handle the AOTC, taxable scholarships and other education topics if you understand the questions the software is asking and if you answer the questions correctly. IMO a pretty good understanding of taxes is required when using any tax software but they can bring things to your attention you may not have caught, do the math and coordinate various items. I’ve always done thorough research above and beyond just answering the questions the software asks. So, it’s a matter of how you feel more comfortable.

55

@twoinanddone Thanks for the help. I’m just going to ask her and see what she does.

56

If your son intends to sell music and simply hasn’t made a profit yet, or if he is using his equipment to record stuff for other people who sell their music and they pay him something for his time, (yes, buying him the occasional pizza could be interpreted as a form of payment) then he probably does have a business going. Give your kid the task of reading through the tax rules for Schedule C to figure out how he can justify this equipment.

57

@mom2aphysicsgeek ,

PM me if you need to discuss.

58

I used the tax software and it worked, but I was very happy that I had done a lot of reading up on the tax credits and reporting and knew what to expect. I definitely had to go back and fix the numbers a couple of times as I go to the next page and figure out that THAT was where I was supposed to put in the outside scholarship or the books and supplies, not on the prior page, that it really was asking me for the amount on the 1098-T, even though I knew that amount was wrong (it would give me a change to put in the right numbers in other places. I have the easiest taxes in the world, one job, no state tax, no special forms or deductions, just the AOTC for two kids, and it still took me hours to get all three tax returns done correctly.

59

This is true for me as well - except I only have one kid who just graduated and has a job. So this year I will lose him as a dependent and lose my Head of Household status, so even though I won’t have to pay his taxes, my tax bill will be a lot higher. I think I need to start a business, and not for the write-offs - I’m going to need more income to break even, and retirement is looming.

60

Same here, on the complexity introduced because of the education expenses and credits and also on the tax bill going up significantly when the children stopped being dependents. And then my husband, who is self-employed, doesn’t pay estimated taxes; ouch!