@3scoutsmom Scholarship timing and tax planning: For freshman year, I asked a couple of outside scholarship organizations to defer forwarding the money to my kid’s school until the second semester (different tax year). They were happy to oblige.
@madison85 I am confused by the example. Doesn’t that example show that if a student has earned income less than the unearned income that the unearned income tax would only be on the equivalent of the taxable earned income? I know that is not the way Turbo Tax calculated our son’s taxes last yr. I am trying to understand how this works. I know TT did not do everything correctly bc it taxed us on the scholarship $$ at the state level when it wasn’t taxable.
If Form 8615 has to be used, isn’t the child’s tax either what it would be using just the 1040/A OR what the 8615 shows, whichever is higher? And the 8615 number for tax owed is based on the parents’ highest marginal rate, correct? This makes my head hurt.
@belknappoint The child’s tax is the higher of with/without Form 8615. The parents’ tax on the child’s taxable unearned income is calculated as the difference between the parents’ tax with and without that income. So I suppose it might not exactly be equal to the marginal rate if there are other things in play such as phaseouts for example.
I know, why does it have to be so complicated!
@mom2aphysicsgeek This example shows that the lesser of the (scholarship income - $2100) and (total income - standard deduction) is subject to tax at the greater of the child’s rate or the parent’s rate.
OK, I think I understand the example in post #18. I ran the same numbers on a Form 8615, making a few additional assumptions: there is no sibling who also needs to file an 8615, and the parent’s taxable income is $100k (25% tax bracket). The conclusion I came to is that the child will owe tax of $425, which is the $1,700 taxed at the parents’ highest marginal rate (25%) that Madison85 concludes with in her example. If there were no kiddie tax/Form 8615, the child would owe tax of $170.
@3scoutsmom, my D’s school divided up her outside scholarships equally between both semesters.
So while we sent the checks in before the first semester started, half shows up for fall and half for spring.
@Mom2aphysicsgeek, I would double check that it was done correctly.
Wasn’t last year the first year that kiddie tax rules applied to taxable scholarships?
I went through the calculations. His unearned income minus deduction was less than his taxable income.
This thread is very helpful! Thank you so much @Madison85 for the example. D is at a full need school and had a mix of Pell, outside and university scholarships to cover most costs.
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For these purposes, I only calculate aid for the Fall of 2015 semester, correct (she is a freshman)
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If tuition/mandatory fees are approximately 24K and she received 32K in aid for the Fall semester (outside scholarships, Pell, state and university) then her unearned income for the purposes of the 8615 is $8000?
If I follow the example form above:
Form 1040:
Income from Wages $3,000
Income from Scholarship $8,000
AGI $11,000
Less: Standard Deduction ($6,300)
Taxable Income $4,700
Form 8615:
Unearned Income $8,000
Less: Allowed Unearned Income ($2,100)
Net Unearned Income $5,900
Taxable Income from Form 1040 $4,700
Lesser of Net Unearned Income or Taxable Income $4,700
Conclusion: Taxable Income of $4,700 consists of $4,700 unearned income taxed at parents’ rate.
$4700 income tax paid at the parents rate?
$1200 tax paid at her rate?
Am I on the right track?
You are on the right track.
Now for the advanced learners - if you would otherwise qualify for the American Opportunity Tax Credit but all tuition was paid with grants and scholarships, consider the benefit of shifting from nontaxable by increasing the taxable scholarship unearned income by up to $4000 to take advantage of the up to $2500 AOTC credit.
Further expansion on Madison85’s advice, with IRS guidance:
The student could put $1700 into his IRA to lower the taxable income & 8615 income to $0, so that the student avoids the
^Also the $1700 of IRA would be withdraw in later years for educational expenses, without the extra 10% tax penalty.
@4kidsdad, thanks for the tip. In our case I don’t think D wants to put $1,700 of her earnings into a Roth IRA (she barely has that much left), even if it would save $255 in taxes.
Also we could have reduced the amount she reports as taxable scholarship income by about $1,600 for amounts paid for books and fees, but we chose to claim them for AOTC, which will give us a credit of $1,600. While she would save $240 in taxes.
@cchelp2019, the amount of scholarships can be reduced by tuition, fees and also books to arrive at the taxable amount. Did your child have work income as well as taxable scholarships and grants as shown in your example?
@Madison85, in @cchelp2019’s example only the amount of $4,700 will be taxed, right? Total income - standard deduction, since that is lower than the unearned income of $8,000 -$2,100 = $5,900
@mommdc D has some income, probably around 3K. So for the other allowable expenses I just take add them right to the tuition number?
@mommdc That tip only works for a traditional deductible IRA.
Yes, lower amount of $4700 (your other question).
@Madison85, yes of course regular IRA. Since contributions to Roth IRA wouldn’t reduce taxable income.
@cchelp2019, yes if you want the student to report the least amount of taxable scholarship you would add all the qualifying expenses of tuition, fees and books together and subtract from total of grants and scholarships.
In our case we pay the bill to the college and they post grants and scholarships to her account in Aug and Dec so it all counts for 2015. Some schools might do it differently.
If you want to claim some expenses for AOTC you could have your child report more taxable scholarship income.
@mommdc All scholarships are posted to her account for the spring semester, as well as tuition. Does this mean BOTH semesters will be reported on the 1098-T?
Remember that when completing the FAFSA forms based on 2015 tax returns, fill in the answer to the question that asks for the amount of taxable scholarships included in AGI.