New Tax law on Taxable scholarships

Paying for College
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Taxable scholarships and the kiddie tax are confusing enough; then add in the changes that are coming starting in 2018 and it’s enough to make you throw your hands up and walk away.

Let’s say that in 2017 a student’s only income was $6,000 in taxable scholarships. Because taxable scholarships are considered earned income when applying the standard or itemized deduction, and because the standard deduction for a single filer in 2017 is $6,350, the student will have no taxable income. The standard deduction will reduce to $0 the amount of taxable income, and the kiddie tax will not be a factor.

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@Mom2aphysicsgeek his taxable income on line 27 of form 1040A would not be $0, it would be the taxable scholarship income from line 7 minus the standard deduction (if he had no earned income from a job).

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^^^
If the taxable scholarship income is less than the standard deduction (and assuming there is no other income), then the taxable income would indeed be $0.

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So if the taxable scholarship plus wages is greater than the standard deduction, how are taxes calculated? Say $10k taxable scholarship, $8k in wages, which would leave $6k of taxable income - but how much is considered earned, and how much unearned? (For FY2018, which I think uses rate tables for trust and estates per this thread?)

ETA: I just realized that my summer income is a “stipend” - would that be taxed as earned or as unearned? It is NOT earmarked for anything specifically (food, travel, conferences, education)… And I was required to work an average of 40 hours per week to maintain the “stipend.”

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@belknappoint But in this case the scholarship greatly exceeds the standard deduction. @mommdc I still don’t follow how the lower earned income means that she only pays kiddie tax on that lower earned income amt vs. the full scholarship amt. I am far too lazy to go and look at our old tax returns, but it just doesn’t seem likely.

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@BelknapPoint Yes, but I was replying to @Mom2aphysicsgeek, and since her son has a full ride, that would not apply to her situation.

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The full $6,000 of taxable income would be considered unearned income under the kiddie tax rules, and it would therefore be subject to the kiddie tax (assuming the student meets all the requirements). Under the 2018 trusts and estates rates, the tax owed on $6,000 would be $1,083.

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@BelknapPoint Isn’t that the same process as prior yrs but with the $6800 personal deduction and then the $2100 kiddie tax exemption? I am totally lost as to where the lower earned income amt mentioned by @mommdc is coming from as the amt controlling the taxes paid vs. the scholarship amt. That is the only place where I am confused.

Our ds had full room and board plus REU stipend which adds up to quite a lot of unearned income according to federal tax law. I am assuming that in the future it would be that full amt minus $12,000 that would be taxable under the trusts and estates rates.

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@BelknapPoint Would the full amount of taxable income still be considered unearned if the taxable income exceeds the unearned income? Say, $8k taxable scholarship, $13k earned income => $9k taxable income. If it’s all considered unearned, then the tax under 2018 trusts and estates rates would be $1803. Otherwise, $8k taxable unearned, $1k taxable earned => $1563 + $100 = $1663.

P.S. Maybe I should change majors. Or not get so ill in the head, if it wasn’t for the fact that I’ll be responsible for FY2018 taxes for the first time, these calculations and such could be somewhat enjoyable…

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The standard deduction for a single filer in 2018 will be $12,000, thus leaving taxable income of $6,000 in CharlotteLetter’s example in post #205. As far as I know, there will be no $2,100 kiddie tax exemption when the new tax law goes into effect. We’ll see when the IRS rewrites the forms and instructions.

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@traveler98 It doesn’t require an audit for IRS to recalculate taxes and ask for money. Most taxpayers never get audited, but many do receive official “Request for Payment” letters from the IRS. I have been audited once in my life, but I get the request for payment letters every 2 or 3 years. My son got one when he was still in his 20’s.

So there is a much higher likelihood of the payment letter going out. They seem to be triggered automatically when documentation doesn’t match up. Taxpayers have a specified amount of time to respond, and if they don’t, then whatever number IRS has come up with is deemed owed, and IRS can and will just come and take the money out of the taxpayer’s bank account.

My AGI is usually under $50K and certainly was for all the years I got those letters. So it’s not a thing reserved for rich taxpayers. Also, IRS has been wrong every single time they sent those letters to me. I never had to pay extra tax, but I did have to send documentation to prove my taxes were correct. But if I hadn’t responded promptly, IRS would have gotten the money they mistakenly thought they were owed.

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For example if the student has $16,000 taxable scholarship and $0 earned income from job.

$16,000 minus $6,350 would be $9,650 taxable income on line 27 of 1040A.
$16,000 minus $2,100 would be $13,900 net unearned income.

According to form 8915 the kiddie tax would be figured on the lower of taxable income or net unearned income.
So that would be $9,650.

In the example of a student earning $3,350 from a job, and having $4,000 taxable scholarship,
the taxable income on line 27 of 1040 A would be $1,000 ($7,350 - $6,350)
And the net unearned income would be $1,900 ($4,000 - $2,100)

So kiddie tax would be figured on the lower of the two numbers, so $1,000

And in the example of $10,000 scholarship and $8,000 wages, the total income would be $18,000 and in 2018 if a standard deduction of $12,000 would apply, then taxable income on line 27 form 1040A would be $6,000.

Now whether the trust tax rates would apply to the whole $10,000 unearned income, or to the lower taxable income of $6,000 or net unearned income ($10,000 minus $2,600??) I don’t know.

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One of my sisters (not the one in question) got those letters for a couple years. She wasn’t missing anything, but she had made some miscalculations once (but not the other time). She paid the rest the first time and showed the documentation the second.

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I think I am finally understanding @mommdc’s posts. I have gone back and read them multiple times.

Say the scholarship is $17000 and the earned income is $5000. I think what she is posting is that the amt of $22,000-$6800=$15,200 is less than $20000- $2100=$17,900, so the $15,200 is the amt determining the scholarship. If so, that makes so much more sense than the way I was originally reading it bc $0 in income does not mean you are paying more kiddie tax which is what I originally thought was being stated.

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I cross posted with you @mommdc. I had just figured it out. Thanks!

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Yes, for taxable scholarship recipients it is good that the standard deduction can reduce the amount that will actually be taxed, and that the kiddie tax rules don’t automatically tax unearned income minus $2,100.

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@calmom, thanks for that clarification although in the case of taxable scholarships there may not be anything to trigger such a request for payment, depending how the school does 1098-T. Reading the IRS 1098-T info, if I’m understanding it correctly the college is not required to prepare or file a 1098-T if QEE is entirely covered by scholarships. The school may have a policy of preparing a 1098-T for all scholarship students but they are not legally required to do so…and I’m sure many prepare only the 1098-T forms that are legally required. From what I read, the purpose of the 1098-T is to make sure everyone who might qualify for tax credits has proof that they paid for QEE. There doesn’t appear to be any IRS form that is designed or specifically intended to report taxable scholarship income to the government and ensure the IRS knows which students owe tax on their scholarships. Of course that doesn’t mean tax is not owed, just that the IRS will not necessarily receive a 1098-T for a full-ride scholarship student and would not have an immediate mechanism to send a request for payment to that student. I don’t know what that translates to for the chance the IRS will contact the student. So 1% chance of audit plus whatever chance the IRS receives and follows up on a 1098-T.

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Does anyone know if stipends for summer internships go into the same bucket as scholarships when figuring taxes, if the stipend is not from a school, college, or university, and is not intended for any purpose? I’ve assumed that mine would be earned income, because I had to work (do research on-site) 40 hours per week, but it apparently is called a stipend…

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@CharlotteLetter

Welcome to the world of the schedule C.

Typically, getting a “stipend” means you are viewed as an independent contractor, not an employee. If you have been paid with checks for the full amount the stipend (no taxes or FICA withheld), then you will probably get a 1099 in January or very early February that shows the amount you were paid.

It is earned income, but it is NOT “wages” or W2 income, and is reported as “business income” on your tax return.

You should be able to use a schedule C-EZ – https://www.irs.gov/pub/irs-pdf/f1040sce.pdf

The good news is that if you had any out-of-pocket expenses associated with your work, you will be able to deduct them as business expenses. For example, if the job requires you to run errands or make deliveries and you do that using your own car, you could deduct the mileage (but you have to have kept track of that!) – or ifyou bought supplies of some sort specifically for that job without getting reimbursed, you could deduct the cost of that. But you probably don’t have much of that.

But the bad news is that if the employer called it a “stipend” and did not deduct payroll taxes, you will have to figure and pay them on your own. These are called self-employment taxes and amount to 15.3% of the total net income – so if you were paid $4000 as a stipend – that would be $612 in self-employment tax owed.

However, you also get to deduct half of that from your total income to reduce your AGI. But that probably won’t help much in your case.

Here are the forms you would be using:

Schedule C EZ - https://www.irs.gov/pub/irs-pdf/f1040sce.pdf

Schedule SE - https://www.irs.gov/pub/irs-pdf/f1040sse.pdf

Form 1040 - https://www.irs.gov/pub/irs-pdf/f1040.pdf (lines 12, 29, 57)

Of course none of us actually fill out these forms on our own - if we are doing our own taxes, we use a software program to do it. There is free software you can use, but some of the free programs won’t handle the schedule C stuff, so it’s something to verify before you start with a free program. One free package that will handle it is CreditKarma – they are new in the tax prep business, only started last year, although CreditKarma itself has been around for many years.

I’d also strongly suggest that you do your own taxes, or at least try to, rather than relying on your parents or their tax guy. Not only because of some of the problems that have already been discussed, but because it is an important life skill. My dad made me fill out my own return back when I was about age 17 and had barely anything to report – and this was back in the day when it was all done on paper – but he wanted me to learn, and I’m glad he did. You can always seek out help later one, but it’s good to at least run through the process on your own.

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@calmom But if it is earned income, aren’t I exempt from filing because I’m below the minimum standard deduction? I was paid by direct deposit but that probably does not matter.

If I’m not exempt from filing, is the only tax I owe self-employment tax (no other income)? So if my AGI goes from $4k to $3388, so what, because both are below the amount needed to file? I will be mailed a 1099 in late Jan. No out-of-pocket expenses (many lunches I was pressured to go to though…)

I have no idea how I’d use schedule SE. PM’d you about doing my own.