Income tax on scholarships - calculation on 1040?

Paying for College
41

@Madison85, yes thanks for bringing that up.

Last year when I did our taxes with Taxact I could print out a handy worksheet that listed the things we should put on the FAFSA and which line etc. It had our AGI, income, taxes and amount of 401k contributions listed I think.

I’m curious if it will do something similar with D’s tax return and would list the amount of taxable scholarship included in AGI.

I wonder will the IRS retrieval tool transfer over the amount of AOTC claimed from the tax return to FAFSA?

42

It should transfer over the $1500 amount, in the case where a taxpayer gets the full $2500.

43

I signed up for my FSA ID the other day, since the PIN signature on FAFSA has changed to username/password.
I had no issues. Now D has to do hers when she comes home for Christmas break.

44

@Madison85, so the refundable part doesn’t go on the FAFSA?

45

This is so timely; thank you to all who have taken the time to help explain how this works. I have one additional question or clarification. For the marginal tax rate, if you are close to reaching the top of a bracket, do the scholarship funds get added to the parent’s income to determine the rate? For example, suppose a parent’s taxable income is $70k. And the child has $15K in taxable scholarships and $3,100 K in earned income. Child then has 12K in unearned income to report, correct? The 15% tax bracket for a married couple ends at $74,900. So, would the child’s unearned income be taxed at 15% or 25% or… the first $4,900 at 15% and the remaining $7,100 at 25%?

46

I think it would be taxed using both rates, if it straddles brackets.

47

@mommdc - The purpose of adjusting the taxes paid line of the 1040 by the $1500 nonrefundable credit is to not penalize the taxpayer’s EFC calculation by this AOTC amount. Adding it back to the tax liability is a good thing.

48

In the following example, the dependent student has $3,200 of earned income and $15,000 of taxable scholarship income. The MFJ parents have no other students in college and have taxable income of $70,000. The MFJ 15% tax bracket goes up to $74,900, and then 25% from $74,901 to $151,200.

It is important to note that the scholarship income of $15,000 is considered earned income when calculating the standard deduction but unearned income when preparing Form 8615.

Form 1040:
Income from Wages $3,200
Income from Scholarship $15,000
AGI $18,200
Less: Standard Deduction ($6,300)
Taxable Income $11,900

Form 8615:
Unearned Income $15,000
Less: Allowed Unearned Income ($2,100)
Net Unearned Income $12,900
Taxable Income from Form 1040 $11,900
Lesser of Net Unearned Income or Taxable Income $11,900

**Conclusion: Taxable Income of $11,900 consists of $11,900 unearned income taxed at parents’ rate.

Child owes [($4,900 * 15%) + ($7,000 * 25%) =] $2,485* tax on $11,900 scholarship income.

*Confirmed with tax preparation software (tax software calculated $2,488).

49

@cchelp2019, sorry forgot about your question, yes I think that the 1098 T would probably show both semesters in that case, but I haven’t seen ours yet. It would probably list tuition and related fees billed for 2015 and then have the box marked where some of the amounts are for semester starting in Jan 2016. And have scholarships and grants listed for the whole year too.

If the scholarships were posted and the bills paid in 2015 then I believe it all is supposed to be counted for 2015.

@Mom2aphysicsgeek, in all our examples with work income of $3k, the taxable income after standard deduction was lower than earned income minus $2,100 allowance. But say your S had income of $5k and taxable schol of $15k.

$5k work income
$15 k schol income
=$20 k
-$6,300 std ded
=$13,700 taxable income

$15 k unearned income
-$2,100 allowable unearned income
=$12,900 net unearned income

so the net unearned income would be lower than taxable income, right?

So would he then have to be taxed at the parent rate on the $12,900 and be taxed on the difference of $800 at his rate?

50

^Correct!

51

And the 8615 form would only calculate the tax on the net unearned income?

52

@mommdc Yes, that is correct. We have been making quarterly payments this yr. I think we need to meet with an acct this yr. We didn’t last yr bc as a freshman he was a dependent from Jan to Aug. But we have not provided any financial support since then (except tax payments and being on our health insurance which is a family plan and it would cost us the same if he wasn’t on it. Two of his older siblings are still on it and yet they can claim themselves and we do not claim them). It is a Catch-22. He works and has scholarship money. He has not lived at home. We don’t provide him any support and yet he can’t say he is supporting himself.

53

@Mom2aphysicsgeek, yes I imagine that is tricky. There was a discussion here somewhere that dealt with this situation.

54

https://www.irs.gov/publications/p17/ch03.html#en_US_2014_publink1000170907

I found this support test.

55

http://talk.collegeconfidential.com/parents-forum/1778277-hooray-your-kid-got-a-full-ride-how-do-they-pay-their-income-taxes.html

56

@Madison85 I thought I was finally getting it but you lost me at the conclusion:

Where does the $4900 and $7000 amount come from? I thought you stated in the line prior that the entire 11,900 would be taxed at the parent’s MFJ rate?

57

Yes, the $11,900 is taxed at the parents’ rates.

The parents’ taxable income was $70,000. Their 15% MFJ rate goes up to $74,900, then becomes 25%.

Thus $4,900 of the $11,900 is taxed at the parents’ rate of 15% ($74,900-$70,000=$4,900). The remaining $7,000 is taxed at the parents’ rate of 25%.

58

@3scoutsmom, I was confused at first as well, but I think the parents made $74,000 and the next higher tax bracket starts at $74,900 so part of the $11,900 ($4,900) gets taxed at the 15% tax rate and the rest ($7,000) then gets taxed at the higher 25% tax rate. The $4,900 is the amount that added tomthe parents income of $74,000 pushes it over the threshold into the next tax bracket.

I know the intricacies of the tax code never fail to amaze me

59

Thanks, I misunderstood the 15% in the example as the child’s tax rate! It makes perfect sense now. Our D’s scholarship will not effect our tax rate so I don’t have to worry about that calculation.

60

So if we provide funds to our children to pay their taxes is that money we can count toward their support to claim them as dependents?