Kiddie tax and taxable scholarships

[cptofthehouse]

The rules for FAFSA are different than those for the IRS to make things more fun.

[twoinanddone]

I thought the FAFSA rule was to always count yourself as a member of the family (1 in college)?

[cptofthehouse]

There are a number of threads with info on how to count dependents for FAFSA. The rules differ enough though they may refer to IRS definitions in places that to mix them up with college students considered dependents for tax purposes makes things very confusing. Professional judgement also can play a role in FAFSA determinations.

[Madison85]

The House passed the SECURE act today which has some provisions that if signed into law could retroactively affect kiddie tax for children of deceased active duty military personnel, children receiving certain tribal payments, children of deceased first responders and college students receiving scholarships.

https://www.wsj.com/articles/house-on-track-to-pass-bill-making-big-changes-to-u-s-retirement-system-11558625474

[cptofthehouse]

@Madison85 , I’m waiting to read what gets signed into law. A lot of changes may yet occur until both House and Senatr finalize and signed by POTUS. A number of provisions in there, I’m watching.

[Madison85]

@cptofthehouse Right, I’m interested in whether the elimination of the Stretch IRA (with a few exceptions) will go through.

[CT1417]

@Madison85 – I am guessing the other provisions will fall apart if Stretch IRA is not eliminated, since they need the funds raised from the taxation of inherited IRAs?

[Jacob856]

If you don’t mind right me in case I’m off-base, however, I accept there is no advantage any longer at all to guarantee your grown-up or young kids on your expense form any longer. The individual exclusions are no more.

[twoinanddone]

A parent can still take a $500 credit for a dependent, including a college student who is still a dependent. There may be other benefits such as using the health care savings account. A friend had a question about using her HSA for her daughter once the daughter was no longer a dependent and I think (not sure) the answer was she had to be a dependent even though she doesn’t have to be a dependent to stay on the parent’s insurance, just be under 26 years old.

[CT1417]

@Jacob856 – I agree with @twoinanddone – $500 tax credit, dependent HSA and/or itemizing unreimbursed medical to claim on tax return (would need high OOP medical in order for this to exceed the standard deduction), and the AOTC in some situations.

[CTScoutmom]

Your all forgetting, we’re talking about low income students - low enough to have zero EFC. Agreed the parents might not benefit from the $500 tax credit if they don’t owe any taxes. Agreed also that itemizing medical expenses isn’t really an issue either (medical expenses would need to be pretty high given that most other deductions are now gone or capped).
But again, we’re talking about low-income families. They qualify for Earned Income Credit. That can be a huge benefit for claiming a dependent.

[twoinanddone]

If you don’t mind right me in case I’m off-base, however, I accept there is no advantage any longer at all to guarantee your grown-up or young kids on your expense form any longer.

I don’t think anyone was talking about only low income, $0 EFC families. @Jacob856 asked if there was any benefit to taking your college student as a dependent. Middle class people can take their children as dependents, and those children may have so much in scholarships and grants to have to pay taxes on it, and those middle class parents may still want the $500 credit, the HSA benefits, the AOTC.

A low income family may benefit from taking the student as a dependent and take the EIC, the refundable part of the AOTC. The middle class family may benefit from the $500 credit, the AOTC, the HSA. Upper class? maybe only the $500.

[CTScoutmom]

Single parent with one in college benefits from Head of Household status - $6000 less taxable income, and HOH tax rates.

Low income families may lose a portion of government benefits with one less dependent, due to income qualifications based on family size.

[mommdc]

Just because they are in college doesn’t mean they are not still your dependent for tax purposes.

[cptofthehouse]

Claiming children, including those in college, as dependents on the 1040 federal return is not linked being the custodial parent on FAFSA.

[Bookis]

@Twoin18;d-2142905

I was very surprised to read this article in the Wall St Journal which appears to have misunderstood the implications of kiddie tax on scholarships (https://www.wsj.com/articles/the-surprising-tax-bill-for-sons-and-daughters-of-gold-star-families-11557480602). Local bookkeeping services http://yourbooksontime.com/bookkeeping-services from company Your Books On Time. Though most of the article is about survivor benefits for minors (which may well be a concern) the statements about college scholarships tend to mislead, because in reality you still get the $12K personal deduction on taxable scholarships. So any hit will usually be quite small when room and board costs are typically not much over $12K. Even more alarming, the recommendation appears to be to simply not report this income and rely on the IRS not “enforcing” these rules:

“The Kiddie Tax revision also threatens college students from lower-income families who receive financial aid for expenses other than tuition and supplies. By law such income is taxable, says Tim Steffen, a tax specialist with Robert W. Baird & Co.
If a family is in a low tax bracket, then a child receiving taxable aid could wind up in a much higher bracket—with no money to pay the tax. Mark Kantrowitz, the publisher of Savingforcollege.com, estimates that more than three million students could be affected.
The Kiddie Tax revision isn’t yet a disaster for some of these students for two reasons. Colleges aren’t currently required to report taxable aid to the Internal Revenue Service, and many don’t. Also, the IRS doesn’t seem to be enforcing the law in this area, tax specialists say.
Still, the law is on the books. Financial-aid providers are alarmed and are pushing to make scholarships tax-free.
Robert Ballard heads Scholarship America, a nonprofit that distributed $264 million to 104,000 students last year. He says, ‘College scholarships are to help students get higher education, but the 2017 Kiddie Tax change is pulling in the opposite direction.’”

yes, this is a big system problem

[Bookis]

@Bookis

If you don't mind right me in case I'm off-base, however, I accept there is no advantage any longer at all to guarantee your grown-up or young kids on your expense form any longer. Local bookkeeping services phone company Your Books On Time: <a href="http://yourbooksontime.com/bookkeeping-services">http://yourbooksontime.com/bookkeeping-services</a>

I don’t think anyone was talking about only low income, $0 EFC families. @Jacob856 asked if there was any benefit to taking your college student as a dependent. Middle class people can take their children as dependents, and those children may have so much in scholarships and grants to have to pay taxes on it, and those middle class parents may still want the $500 credit, the HSA benefits, the AOTC.

A low income family may benefit from taking the student as a dependent and take the EIC, the refundable part of the AOTC. The middle class family may benefit from the $500 credit, the AOTC, the HSA. Upper class? maybe only the $500.

yes, this is a big system problem

[Bookis]

@Twoin18;d-2142905

I was very surprised to read this article in the Wall St Journal which appears to have misunderstood the implications of kiddie tax on scholarships (https://www.wsj.com/articles/the-surprising-tax-bill-for-sons-and-daughters-of-gold-star-families-11557480602). Local bookkeeping services http://yourbooksontime.com/bookkeeping-services from company Your Books On Time. Though most of the article is about survivor benefits for minors (which may well be a concern) the statements about college scholarships tend to mislead, because in reality you still get the $12K personal deduction on taxable scholarships. So any hit will usually be quite small when room and board costs are typically not much over $12K. Even more alarming, the recommendation appears to be to simply not report this income and rely on the IRS not “enforcing” these rules:

“The Kiddie Tax revision also threatens college students from lower-income families who receive financial aid for expenses other than tuition and supplies. By law such income is taxable, says Tim Steffen, a tax specialist with Robert W. Baird & Co.
If a family is in a low tax bracket, then a child receiving taxable aid could wind up in a much higher bracket—with no money to pay the tax. Mark Kantrowitz, the publisher of Savingforcollege.com, estimates that more than three million students could be affected.
The Kiddie Tax revision isn’t yet a disaster for some of these students for two reasons. Colleges aren’t currently required to report taxable aid to the Internal Revenue Service, and many don’t. Also, the IRS doesn’t seem to be enforcing the law in this area, tax specialists say.
Still, the law is on the books. Financial-aid providers are alarmed and are pushing to make scholarships tax-free.
Robert Ballard heads Scholarship America, a nonprofit that distributed $264 million to 104,000 students last year. He says, ‘College scholarships are to help students get higher education, but the 2017 Kiddie Tax change is pulling in the opposite direction.’”

yes, this is a big system problem