I know there are several threads, but I’m still confused… Could someone explain the Kiddie Tax Rule to me? Is there any way to avoid it? I was grateful to earn enough money in scholarships to meet my entire COA, and I would like to be prepared come tax season.
@BelknapPoint does a nice job of explaining the kiddie tax…as does @mommdc.
If you are required to comply with the kiddie tax provision, there is no way to “avoid” it.
It would help if you take a look at the rules and then come back here with specific questions.
Instructions for IRS form 8615 (aka the kiddie tax):
@neuro2021 after you get your Federal kiddie tax figured out don’t forget to look at any state tax implications too. We live in Texas which does not have a state income tax but DD was awarded scholarships in OK (where she attends schools) and she worked for 6 weeks at summer camp in MA. She ended up only owing about $40 in OK taxes, but because of the way MA figures their taxes, even though she earned very little money they ended up keeping all but a few dollars of the state withholding tax. I really thought she would be getting most of that refunded back to her. It ended up costing more to actually file the MA taxes than she got back.
Basically if you get scholarships or grants, you need to figure out how much of it is taxable.
The part that covers tuition, qualified fees, and books, is not taxable.
The part that covers nonqualified education expenses like room, board, transportation, medical, is taxable.
You might get a 1098T from the school for 2017 which might help determine your qualified tuition and fees amount and then you can add the books to that to get your whole QEE for 2017.
Then you need to figure out how much of the taxable scholarship is subject to the kiddie tax.
For the purpose of figuring your standard deduction, scholarships are considered earned income. So if you worked and had taxable scholarships, you get a $6,300 standard deduction on your federal taxes if you are dependent of your parents.
For the purpose of figuring the kiddie tax, scholarships are considered unearned income. The kiddie tax came to be because some parents were putting investments in their children’s names because they had a lower tax rate.
With the kiddie tax, child unearned income over a certain amount is taxed at the parent rate.
For example, my D has a job and earned $3,000, she also had taxable scholarship of $4,000. Together that’s $7,000.
So if you subtract $6,300 from that, she would get taxed at our tax rate on the $700. I think that was about $100.
Not quite. If the child has taxable income because the deduction has been exceeded, and the child otherwise comes under the kiddie tax, it generally works like this for tax year 2017:
-Income from $0 to $1,500 is not taxed.
-Earned income (by the kiddie tax definition) more than $1,050 is taxed at the child’s rate.
-Unearned income (by the kiddie tax definition, which includes taxable scholarships) more than $1,050 but less than or equal to $2,100 is taxed at the child’s rate.
-Unearned income (by the kiddie tax definition, which includes taxable scholarships) more than $2,100 is taxed at the parent’s highest marginal rate.
The standard deduction for tax dependents is different and probably applies in many of these situations. From IRS Pub 17:
*The standard deduction for an individual who can be claimed as a dependent on another person’s tax return is generally limited to the greater of:
$1,050, or
The individual’s earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $6,300).
Earned income defined. Earned income is salaries, wages, tips, professional fees, and other amounts received as pay for work you actually perform. For purposes of the standard deduction, earned income also includes any part of a taxable scholarship or fellowship grant.*
I’m sorry but my D’s income above the standard deduction was clearly taxed subject to kiddie tax rules (form 8615 was attached, and the effective tax rate was higher than her 10% tax rate), and she got the full $6,300 standard deduction, even though her work income was only $3,000 (because her taxable scholarship also counted as earned income for the determination of her standard deduction).
If you look at form 8615 it shows the calculation of the kiddie tax, based on child income (the lower of unearned income minus $2,100, or child’s taxable income ), and parent taxable income.
https://www.irs.gov/pub/irs-pdf/f8615.pdf
Subject to the kiddie tax does not mean that it’s all taxed at the parent’s highest marginal tax rate.
Question for anyone with experience: does TurboTax handle the kiddie tax implications of taxable scholarships?
I used Turbotax for my D in the last two tax years and it seemed to handle it fine. But I went through the education interview questions and said that her taxable part of scholarship was used for room and board, and that seemed to put it on the wages line with SCH next to it correctly.
Re #7: well, her taxable income (total income from wages + taxable scholarship - $6300) was added to the parent taxable income and the tax figured from the parent tax table. Then the difference between original parent tax amount minus new parent tax amount was her kiddie tax.
I was just giving an example of how it worked for us.
Please consult your tax advisor concerning your own situation.
Thanks for the responses. I’ve been looking over the instructions and forms. Taxes are all so new to me; I only started working this year.
So far, I earned approximately $2,000 which paid for AP tests, housing/enrollment deposits, etc. I plan on continuing to work part time during college. I will be receiving scholarships in the amount of ~40,000. Tuition and fees are ~$25,000. Does this mean that about $15,000 will be taxed at my parents’ tax rate and my earned income will continue to be taxed at my rate? Also, will my unearned income (taxable scholarships) be added on to my parents income in regards to calculating their own tax?
Thank you.
Actually, let me just make sure I’ve got this straight. So essentially, It’d be $15,000 + $2,000 and additional wage earned money - $6,300 in deductions = $10,700. That’s then added to my parents’ income to determine a tax based on the appropriate rate. Then, my parents’ original tax without anything added is subtracted from the tax just calculated to determine the tax for the scholarships going over qualified educational expenses?
Hoping my understanding is right!
It’s not added to your parents’ income. You fill out your return, they fill out theirs. Your return will ask for their information and income.
You say you’ve earned $2000 so far. Scholarship or wages? If it is scholarship, you’d just add that to the total scholarship amount, so now you’d have $42k in scholarships, subtract all the qualified educational expenses (tuition, fees, books) and the amount remaining is your unearned income. The items you listed, AP exams and housing enrollments, will not be QEE. The enrollment deposit probably is, but it will be used to lower your tuition bill.
To make it all more confusing for you, the tax year is not the same as the academic year. I separate the two, and for the spring semester count all of the scholarships and QEE in the same tax year (the spring’s tax year). The 1098-T may not do that, so you do not have to use the figures on the 1098-T.
I have found Tax Act and Turbo tax do the calculations correctly if you enter the correct information on the correct line. Another program I tried to use last year, I think it was FreeTax or something with ‘free’ in it, did not ‘support’ the kiddie tax form.
Whoops, $2,000 is just what I’ve earned so far this year from a part time job.
Yes, on the form 8615 it does add the lower of the child’s net unearned income (unearned income minus $2,100) or child’s taxable income (total income minus $6,300) to the parent’s taxable income as part of the kiddie tax calculation.
If you have $2,000 work income and $15,000 taxable scholarships, then that would be total income of $17,000. Then the standard deduction would bring your taxable income down to $10,700.
$10,700 is lower than $12,900 ($15,000-$2,100).
So let’s say your parent’s taxable income (line 43 of 1040 or line 27 of 1040A) is $60,000. Then a new tax is figured by adding the $10,700 to the $60,000 and looking up the tax in the tax table for the parent filing status.
Then the original parent tax amount from line 44 of 1040 or line 28 of 1040A on their $60,000 alone is subtracted from the “new tax”, and the difference is the kiddie tax for the child.
At least this is my understanding on how the form 8615 calculates it.
When you go through turbotax, it will figure the taxable scholarships and will ask for parent taxable income from their tax form, to figure kiddie tax.
Of course like @twoin said, the school might only report the fall semester scholarship and tuition and fees on the 2017 1098T. Then you might only have half as much of taxable scholarship for 2017. It depends.
The student income is NOT added to the parent income on their return. The STUDENT is the one who,has this income…and the tax liability.
Your parents will have their tax return and you will have yours. Their effective tax on their return will not change. Your income will not be added to theirs on their tax return.
But their taxable income will be used to calculate your kiddie tax. For kiddie tax calculation purposes on form 8615, your taxable income will be added to their taxable income (unless unearned income -$2,100 is lower).
@Madison85, please correct me if I am wrong
So does the student (having income of say 17000 as shown above) have to file a separate tax form independently where the student says he/she can be claimed as a dependent on someone elses tax forms ? The above seem to indicate the student does not have to file separately.
Yes, the student files their own tax return reporting taxable scholarship income.
The posts about the kiddie tax calculation are referring to the way the kiddie tax due will be computed on form 8615, and the parents’ taxable income from their tax return is needed for that calculation.
The studen’s taxable scholarship income is not added to the parent tax return.