Kiddie tax and taxable scholarships

Paying for College
41

I believe federal aid can’t be disbursed until 10 days before term starts.

School 1 usually posts scholarships, grants and loans exactly 10 days before term starts, but if spring term starts on Jan 7 and 10 days before would fall on a day that the FA office is closed, then it might not post until beginning of January.

School 2 seems to wait until after add/drop to post the aid.

My D had $7,000 in work income and $4,000 in taxable scholarships.
The standard deduction covered that and no tax was due. I think she received about $400 back from tax that was withheld from her paycheck.

Next year the standard deduction will increase a bit. Also book expenses can also be subtracted from scholarships and grants to arrive at taxable amount, in addition to tuition and fees.

A few years ago my D reported grants as taxable that covered housing, and tuition scholarship was tax free. We in turn claimed the fees and books towards a partial AOTC.

Back then the standard deduction for dependent students was only around $6,000 so she owed about $150 in kiddie tax (which we paid for her), and we got about $1,000 in AOTC.

42

The scholarships and grants are counted for the year they were received.

For AOTC it matters when QEE was paid.

43

My D had the spring bill come out in November and due in December.

But aid was posted on January 8th I think.

S had similar due date in December and aid was posted in February, after add/drop I believe.

The school won’t be able to apply Pell Grant or loan until 10 days before term starts, but I guess they can use their judgment on when other aid gets posted like institutional grant or scholarships.

I don’t know a school that posts the aid when bill is due. It is counted as “anticipated” so there is no balance left, but it was always posted later in our experience.

44

My personal experience, for another data point:

-Spring semester expenses posted December 1
-Institutional grant for spring semester posted December 2 (not designated as “anticipated”)
-Spring semester billing statement dated and available December 5
-Spring semester expenses payment due date January 2
-Spring semester classes start January 16

45

Yes, I said in above post that the school can use their own discretion in regards to timing of posting their own funds like scholarships and institutional grants.

So maybe some schools do post them early. I just haven’t come across this in our experience with only public universities. They post all of the aid at the same time, no earlier than 10 day until starting of term.

1 Like
46

I am trying to understand this all. We mostly forfeited AOTC for our S15; wish we had looked into these scenarios with him taking it on his taxes.

someone above mentioned LLCs. Can a kid claim those?

D16 will be in college 5 yrs undergrad (transfer student). We are using AOTC 4 years. as parents we don’t qualify for LLCs for her because of income amounts. Can she claim them on her own? would it be of any benefit? i’ll assume her income is less than 12K$ for that year. . . .

47

She may be able to the LLC if she is not claimed on your return. The benefits are a lot less than the AOTC

My daughter only had 1 semester (spring senior year) which was also her first year of being independent for taxes. She didn’t have enough in paid costs to benefit.

48

Fwiw, our ds had scholarships $$ that was always dispersed prior to Jan, so we paid his taxes in 4 academic yrs vs 5 calendar yrs. Dd’s scholarship $$ freshman yr was also dispersed that way. This yr, sophomore, we received a letter from them saying that according to new tax laws, they were going to start reporting by calendar yrs vs academic yrs, so this yr we had already paid 1/2 from last yr and only paid 1 semester this yr.

Fwiw, my personal preference would be academic yrs. Ds is in grad school across the country and has all of his other tax related stuff. I am glad we didn’t have to get involved in doing his taxes across multiple schools’ scholarships, grants, research, state taxes, etc. Makes my head spin to think about it. Dealing with 2 states was enough.

49

I have been reading through this post an another on CC as well. I remain somewhat confused… hoping I will go into the light of full understanding soon :wink: .

I think we might need to make a payment to the IRS soon because of a change in my daughter’s scholarship income and I am trying to calculate how much to send in. I think that in the past maybe we were supposed to- but my husband did not do so and somehow we did not get fined. However, with the increase in her scholarship income this summer, I think we will need to send a payment to avoid a fine.

In addition to my daughter’s full-ride scholarship, she was awarded a research fellowship for the summer. Some time ago, I read through the wording on the granting fellowship’s website and concluded that it would be treated like a scholarship by the IRS and be subject to the Kiddie Tax rate.

She is a rising senior in college. A estimate of her taxable income is:

$13K scholarship for room and board

$3K in earned income from part-time job
$4K for summer research fellowship that is counted as a taxable scholarship

Misc details from last filing we did using Turbo Tax ( I could be wrong in my recall- we just following their directions, plugging in numbers when they asked):

- We claimed her as a dependant on our taxes
- We were able to use AOTC for about a $1K tax credit on our taxes (I think we paid tuition for a summer class?)
- I think she put some or all of the scholarship on her tax return

For this year’s tax situation, would she be able to claim the single tax deduction of $12K on her taxable income, resulting in paying kiddie taxes on: 13K + 4K - 12K deduction?

If so, and we buy her a new computer this year, will we be able to claim her as a dependent and use the AOTC tax credit for the cost of the computer on our taxes?

Or, will we need to do the Kiddie tax calculation in which the standard deduction is $3K + $350.00?

Is there interaction between the choices you make? For example, if we want to use the AOTC, does that mean that she would be restricted to using the standard Kiddie deduction instead of the $12K deduction?

If I can figure out the deduction to use, I think I can calculate how much to send in to the IRS as advance payment.

Thanks in advance for any help!

50

Whether you can claim her as a dependent is a separate issue. If she is under 24 and a student and you provide 50% of her support, you can claim her. If you claim her, you may qualify for the AOTC. You’ll also qualify for a $500 credit. There is a worksheet for determining if she is a dependent.

Assuming you do claim her, she can claim up to the $12k standard deduction. In your example of $13k + $3, + $4k, she’ll get the entire $12k standard deduction so her taxable income would be $8k. She could have withholding taken on the earned income. You could make an estimated quarterly payment if you prefer. She just has to have as much taken out as she paid in taxes last year to avoid a penalty. If she paid no taxes for last year, she won’t be penalized next year.

Computers are only considered QEE if required by her program/school.

51

@twoinanddone

Thank you sooooo much!! I thought maybe what most of you said applied; it is nice to hear it said so concisely! I have spent so much time reading bits and pieces of this information and some posts I read were not accurate, so this really clears things up. I had no idea pre-payment was tied to last year’s taxes owed- I thought it was just based on your estimate of what would be owed for the tax year that payments are being made. Thanks for providing that info as well. I feel my headache going away :smile: .

52

@twoinanddone

So, in my example of:
$13K scholarship for room and board
$3K in earned income from part-time job
$4K for summer research fellowship that is counted as a taxable scholarship

She would get a 12K deduction and pay taxes on the remaining 8K.
Of the 8K on which taxes are owed, 3K is earned income and 5K is unearned.

So, am I correct in saying taxes owed on the earned income would be 10% of the 3K?

And then, the unearned income would be taxed at the trustee rates described in this article- https://www.marketwatch.com/story/new-tax-law-makes-dreaded-kiddie-tax-more-expensive-2018-09-24 ?

This article mentions a unearned income threshold of $2,100.
Then for the first $2550, after the threshold, the rate is 10%
For the amount between $2551 & $9150, the rate is 24%

Does this article apply to scholarships and likewise- does the threshold apply?

Thanks :slight_smile:

53

And then I found this post by BelknapPoint:

“Your post revolves around the kiddie tax. Taxable scholarships are considered unearned income for the purposes of the kiddie tax. Starting in 2018, unearned income taxed under the kiddie tax will be subject to the rates used for trusts and estates. Generally, the first $1,050 of such income is not taxed because of the standard deduction taken by those who are claimed as a dependent on someone else’s tax return. The next $1,050 of such income is taxed at the child’s rate. Anything over that is taxed using the kiddie tax. For 2017, that means using the parent’s highest marginal rate. For 2018 on, that means using the rates for trusts and estates.”
from http://talk.qa.collegeconfidential.com/financial-aid-scholarships/2042587-new-tax-law-on-taxable-scholarships-p20.html

54

Whether you can claim a student as a dependent is not whether you provided 50% of support but whether the student herself provided more than 50% of her own support! Scholarships don’t count towards the support. A student is supposed to check that little box saying “can be claimed as a dependent) if a parent can claim, whether the parent dies or not.

In above case, the numbers do not support that student having supported self 50%.

If she claims some of her tuition scholarship, as taxable, it can open the window for you getting the AOTC As well as the $500 depends credit.

If she throws $4k in as taxable, she’ll have have $21k in taxable scholarship money. Subtract out the $12k standard deduction and she’ll have $9k that she has to pay “Kiddie tax” using the estate and trust schedule. The $3k is ordinary income and taxed that way.

I’m just doing this off the top of my head and am not a tax accountant. From what I understand, Congress is going to be changing the onerous Kiddie tax schedule for taxable scholarships. It’s crazy that the scholarships are treated as earned income in that the standard deduction applied to them but then they are taxed as unearned income. Even worse is the change to using the trust and estates rates rather than the top marginal tax rate of the parent.

55

@momofsmartdancer

Based on those numbers, your daughter’s total tax would be $1,563.

Four calculations need to be made: gross income, taxable income, net unearned income (NUI) and earned taxable income (ETI). NOTE: ETI is a new figure drummed up for the new tax law. It is ONLY relevant to computing kiddie tax and nothing else. It is NOT the same as earned income.

GROSS INCOME:
$13k in unearned income
$7k in earned income (scholarship in return for research or teaching is earned income)
= $20k gross income

TAXABLE INCOME
$20k minus $12k* = $8k taxable income

*The standard deduction for a dependent is the greater of $1,050 OR sum or earned income plus $350 (capped at $12k). This is key: For the purpose of calculating a dependent’s SD, unearned taxable scholarships are treated as earned income. Then it magically reverts to being unearned income when it’s time to compute the tax owed.

NET UNEARNED INCOME (unearned income minus $2,100)
$13k minus $2.1k = $10,900 NUI

EARNED TAXABLE INCOME (not the same as earned income) = taxable income minus NUI
$8k minus 10,900 = <0
ETI is 0

These are the new kiddie tax rates for tax years 2018-2025. [IRS Sec. 1(j)(4)(B) and Sec. 1(j)(2)(C)]

Your daughter’s tax is $1,563.00.

You can compute it with the Form 8615 worksheet. It’s not as complicated as it looks once you plug in the numbers.

Report all this income on Form 8615.
Then enter the tax computed on Form 8615 onto Form 1040, line 11.

This is her total tax before subtracting credits, if any, and before adding tax on long-term capital gains, if any.

There is NO bifurcation between tax on EARNED income and tax on UNEARNED income for a dependent child who has unearned income. For tax years 2018 to 2025, it’s all computed as shown above. Unless the proposed amendment passes, in which case it will all change for next year. Good luck.

56

@momofsmartdancer

No, not correct. Tax on earned and unearned income are not bifurcated in this situation. Exception: If the tax filer has long-term capital gains, that sum is subject to a different tax rate and is pulled out of the formula for computing THIS tax.

The earned and unearned are combined in a formula on Form 8615. The resulting number on Form 8615 is subject to the new rates for trusts and estates. which is what I highlighted in previous post.

A simpler way of explaining the trusts and estates rates is this:

If taxable income* is not more than $2,550, then tax = 10% of taxable income*
If taxable income* is > $2,550, but not more than $9,150, then tax = $255 plus 24% of the excess over $2,550.
If taxable income* is > $9,150, but not more than $12,500, then tax = $1,839 plus 35% of the excess over $9,150.
If taxable income* is >$12,500, then tax = $3,011.50 plus 37% of the excess over $12,500.

*as computed on Form 8615

The ENTIRE result of Form 8615 is subject to this^^^^.
Here is Form 8615. https://www.irs.gov/pub/irs-pdf/f8615.pdf
Here are instructions for Form 8615. https://www.irs.gov/pub/irs-pdf/i8615.pdf

The final tax paid will depend on credits, if any, and tax on long-term capital gains, if any.

57

@cptofthehouse
Thanks for clarifying the AOTC and dependency credit. I am starting to wrap my mind around this stuff.

58

@brantly
Wow. I am impressed with your knowledge on this. Thanks so much for the detail. It is a great help to both me and I am sure it will provide understanding to other readers in the future who are looking for the same information. It is great that you were able to use the correct terminology as I get confused reading posts and articles who might refer to the same thing in different ways. Your specificity really helps elucidate the concepts behind the calculation. This is very helpful for those who need to plan for their tax bills or make quarterly payments. So much better than just the plug and chug involved in Turbo Tax which does not result in meaningful understanding of more complex situations.
Thanks again!! :smile:

59

You’re welcome. I am not a tax expert, by the way. But I spent many hours trying to wrap my head around this. I read the original tax code, the IRS instructions, and articles in The Journal of Accountancy. I also did a few hypothetical run-throughs. I welcome anyone pointing out any mistakes I might have made.

60

It is very good to know about what you think should happen before you put it into TurboTax. At least a few times I’ve screwed up and either put double the scholarship amount (from the 1098t and my numbers) or half! I look at it and go “Wow, that’s wrong.” Honestly, I take a break and then start again.

Also, have you child send you the receipts for books purchased in Sept and Jan, NOT on April 14th!