New Tax law on Taxable scholarships

Paying for College
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@traveler98 – I agree with what you say in post #216, except for the “chance of audit” comment – I don’t know how big or how small the actual chances are, but it’s not a good idea for a young person starting out in life to have a cavalier attitude based on small risk. I mean, what are the risks that I will get in a car accident every time I go out for a drive? I haven’t been in an accident in more than 20 years, and I’ve never been in any accident that totalled a car or caused serious injury --and I have been driving for almost 48 years. Lots and lots of accident-free miles. And yet I buckle up my seatbelt and make all my passengers buckle up every single time.

Risk analysis makes sense for actuaries dealing with large number, but “I probably won’t get caught” is not a good setting for that. It may very well be true… but plenty of people do get caught – and Charlotte says she wants to work in government and get a security clearance. So she may very well have to turn over her tax returns for scrutiny by an agency other than IRS – so she doesn’t want to make mistakes that will haunt her down the line.

Keep in mind that IRS priorities also change over time. I think that those “Request for Payment” letter are probably a very cost efficient way for IRS to collect a lot of money, including money that really isn’t owed – because I’ll bet a lot of people simply pay up for smaller amounts rather than try to figure things out and go through the trouble of documenting it and sending a letter off to the IRS. So it probably is beneficial for IRS to set their algorithms to be aggressive in sending out those letters.

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If your self-employment income is more than about $433 for the year, you will need to file a full tax return in order to pay the self-employment tax and take the self-employment tax deduction.

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@CharlotteLetter -
You have to pay self-employment tax on any income over $400. See https://www.freelancetaxation.com/the-minimum-freelancers-need-to-earn-in-order-to-have-to-file-income-taxes

And the employer needs to file a 1099 for payments over $600. So IRS will see the 1099.

The reason I get so many of those IRS letters is that I am self-employed and every single time that IRS gets a 1099 that it can’t match up to my schedule C it generates a letter claiming that I have unreported income and seeking money for that. Usually if the 1099-issuer marks “nonemployee compensation” on the 1099 form IRS figures it out, but over the years I’ve had a lot of 1099’s that are marked as “royalties” or “other income” even though the payments were in fact made to me for services rendered. And every single time that happens, I get a letter, because the IRS computer doesn’t seem to be able to simply tally up the 1099’s and compare them to the amount entered as “Gross Receipts” on the Schedule C.

Yes, that would be true.

As noted, for self-employed you have to file whenever earnings are over $400.

If the employer told you that, then definitely it is self-employment income and you will have to pay the SE tax. If it’s any consolation, that is the FICA that would otherwise have been withheld from your wages, except that you have to pay both the employee and employer portion of the FICA. That’s the dollars that go towards social security and medicare … two things you will be very glad to have when you get to be my age (assuming that the government doesn’t’ manage to mess up those programs in the meantime).

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@calmom I see what you’re saying but I know you’ve read my other posts in this thread and I do NOT have or encourage a cavalier attitude about paying taxes on scholarships. The chance of an audit IS low and it does no good to pretend otherwise. The truth is that the IRS does NOT get a 1098-T for all students who may have taxable scholarships, and it does no good to pretend that every student who doesn’t pay taxes owed on scholarships is definitely on some list with the IRS.

I do not advocate evading taxes, nor do I encourage anyone to think it will be fine to neglect paying taxes on scholarships based on the low likelihood of audit and the possibility that the IRS doesn’t have a 1098-T for them. If someone wants to roll the dice that’s up to them, but I’m making sure my son pays what he owes and I believe anyone else in this situation should do the same. However I do not apologize for mentioning either the low audit likelihood or the fact that many students with taxable scholarships are not on the IRS’s radar because no 1098-T exists.

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@calmom Actually, I want to intern in government for my college years, and I’m taking my first actuarial exam next year. I tend to think that if I want a career as either a tax or insurance actuary (or anything really), doing my taxes properly is a good idea.

So, does this sound right?

C-EZ: Lines 1 and 3 - $4000 (line 2 - deductions - is $0)

SE: Lines 2-3 - 4000, Line 4 (.9235line 3) - 3694, Line 5 (.153line 4) - 565.18, Line 6 (.5*line 5) - 282.59

1040: Line 12: 4000, Line 27: 282.59, Line 37 (line 12 minus line 27): 3717.41, Line 40: 6350, Line 41: -2632.59, Line 43: 0, Line 57: 565.18

I’m not sure if I was really self-employed though. Per the (technically not employer) kind people who paid me O:-), “A stipend is generally an amount paid for the benefit of a student or an attendee of a class, workshop, or training project for their attendance or participation ONLY, not for services rendered.” Actually… someone from USRA asked this on TurboTax:

https://ttlc.intuit.com/questions/3784995

That advice is that it’s basically a scholarship for non-QEE. Since it’s greater than $1050, then the tax would be 1050.1 + 1900.28 = 637. Hmm, I prefer SE tax for this year, it’s slightly cheaper…

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Did you “render services” at your job?

My daughter got two college grants totalling $3000 to fund an unpaid summer internship with a nonprofit agency and at the end of the summer the agency also gave her a $1000 bonus. She ended up with 1099’s for all of that income & reported it with the schedule C-EZ.

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ETA: It appears as “other income” (box 3). I have no idea which it’s supposed to be filed as, and my mom says that self-employment taxes have to be filed quarterly. Since my internship ended in August, I have no idea when I would be required to file, then.

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Either as other income on line 21 of 1040 or business income on line 12 of 1040 or scholarship income on line 7 of 1040

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@CourtneyThurston do you have some advice for @CharlotteLetter regarding taxation of summer internship stipends?

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https://ttlc.intuit.com/questions/2879038

I found this regarding 1099 misc and the different boxes.

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I did research at my internship.

I asked my sister about her experience. Apparently I misunderstood. The first year, she used my parents’ accountant, who filed it as “other income” on line 21 of the 1040, and referenced the 1099-MISC, which had it in box 3. It so happened that it was less than the standard deduction, so she didn’t end up paying anything. No letters that year.

The second year, she did not use my parents’ accountant, but duplicated the procedure. That year, she got a “Request to Pay” letter, telling her to pay SE tax. She sent a letter back explaining that it was a research internship and that she just duplicated the procedure the family accountant used the previous year. The IRS sent her a bill for 10% of {her income minus $1k}. FYI, she should have been under the Kiddie Tax rules and she earned over $2k, so I’m not sure why she wasn’t taxed at our parents’ rate for the last several thousand above $2k.

So I’m seeing 3 versions:

(1) put it on line 21 of the 1040, and not pay anything because it’s below the standard deduction, and no state taxes because there’s no taxable income
(2) treat it as self-employment income and put on line 12, and pay SE tax; no income tax because it’s below the standard deduction, and no state taxes because there’s no taxable income
(3) treat it as a fellowship/scholarship and put it on line 7, with the notation that it’s a stipend; pay 0% for the first $1050, 10% for the next $1050, and my parents’ rate for the remainder, and also pay whatever state taxes are

If I’m not mistaken, (1) and (2) are earned, and obviously (3) is unearned.

My guess is that (2) and (3) are closest to right, since when my sister got randomly selected for audit, she was told that (1) is wrong. Now… is (2) right because that’s what the IRS asked for in their letter? If their letters aren’t always right, is (3) right?

For FY2017, (2) is cheapest for me by $100, but I’m not sure about in the future years, with larger summer income and possible non-QEE schollies.

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https://ttlc.intuit.com/questions/3784995-1099-misc-for-a-stipend-payment-where-do-i-put-it

^^ sorry this is the link I meant to post

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The above link in post #229 seems to indicate that it’s only self employment income if it’s listed in box 7 of 1099 misc. But I haven’t dealt with this myself.

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@mommdc Same one I linked to in #224. I’m not sure.

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Charlotte, you’ve done the math correctly for the SE tax - it would be $565 (you can round up or down to the nearest dollar).

Don’t listen to your mom for tax advice. I am sure your mom is a good person, but unless she is a tax accountant or tax lawyer, she’s not an expert.

Only people who owe more than $1000 annually in self-employment tax are required to pay quarterly. $518 is less than $1000. Therefore you don’t have to pay quarterly – you need to pay by April 15, 2018.

@4kidsdad is basically right that you can elect where to put the information —because as long as you report it income somewhere plausible, IRS will not seek penalties if they decide it should have been reported in a different way. They tend to have a very dim view of people who try to get away with not reporting income at all, but be more forgiving of people who just enter it in the wrong spot. That doesn’t mean you won’t have to pay the extra tax if IRS decides it is on the wrong line – it’s just that you would only have to pay the tax itself and interest, no penalties.

Your sister was not “randomly selected” or audited. A request to pay letter is NOT an “audit”, and it is not random – it is generated automatically whenever information tied to a taxpayer ID doesn’t match up.

Line 7 is for “salaries, wages, tips” - earned income. I personally would not recommend putting 1099 information there, because IRS will be trying to reconcile that number with W2 income. I think you should go with either line 12 (business) or line 21 (other). You need the schedule C and SE for line 12, but not for line 21.

As to the kiddie tax thing – I really don’t know and I am really think that is unclear. The whole reason the kiddie tax was created was to prevent wealthy parents to avoid taxes on investment income by transferring the assets to their kids. Here’s an article that explains how the possible inclusion of scholarships came about: https://www.thetaxadviser.com/issues/2016/apr/kiddie-tax-may-be-due-on-college-scholarships.html

If the “other” box is checked on your 1099 (box 3), you probably will be safe to report on line 21 and skip the schedule C and self-employment tax – but you would have to also treat that money as “unearned” income and only enter $1050 on line 40.

But if you get the 1099 and the “nonemployee compensation” box is checked (box 7) – IRS is going to be looking for a schedule C. And if you write an amount higher than $1050 on line 40 – (such as $4350, earned income +$350, from standard deduction worksheet for dependents) – then IRS will want to see SE tax.

That’s probably what happened with your sister – she probably wrote off the full amount as her standard deduction, essentially electing to treat the money as earned income. Then when she wrote IRS back, they allowed her to elect to treat the money as unearned, and taxed her on the amount over $1050.

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@mommdc – Turbotax is not an authoritative source for tax info. IRS wants FICA paid on all earned income up to the max (~$127K) – so if income comes from work, it is either W2 income and the employer pays half, with the employee share withheld from every paycheck – or the earner needs to pay SE tax.

Is it acceptable for an earner who doesn’t claim any “business” deductions to simply enter the amount on line 21 and use that amount on schedule SE, rather than messing with the Schedule C? While I hadn’t thought of the possibility of doing that, I don’t see why not. It probably doesn’t come up that often because once someone understands the tax system, they’ll want to take advantage of the opportunity to write things off as business expenses as much as possible. There’s a lot of wiggle room there depending on the type of work.

FWIW the instructions for line 2 on the form SE references schedule C income, but then includese the statement, “See instructions for other income to report”. So that might be where we will find the answer.

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@calmom The “other” box was checked on hers, so it most likely will be on mine (same organization, same internship, I just made less because of being in high school vs being in college).

I think what my sister, or rather the accountant, because my sister knew nothing about taxes, did the first time (not generating a letter) was put the income in line 21, referencing the 1099-MISC, AND use the standard deduction (which was around $100 more than her income) on line 40. So she ended up paying nothing. Maybe the accountant wrote some acceptable words in the box on line 21 that she forgot to include. I’ll have to ask her to see her copy of the returns again, because the second time around she tried to duplicate it.

She wrote the wrong standard deduction in, for the year she did it without the accountant. (She wrote in the previous year’s, which was lower. Both were less than her income + $350, and obviously neither of them was $1k.) Either way, her taxable income using the whole standard deduction was $0 under that calculation. Could the letter have been generated because of her using the previous year’s standard deduction?

If I write $1050 as the deduction, I’m treating it as unearned income… I don’t know how the remainder would NOT fall under Kiddie Tax rules.

It’s frustrating that the income (which IMO, is neither “unearned” nor “self-employment”) is such a grey area.

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@calmom Here is what I find confusing about the information at that link you provided on this thread (page 11): it suggests that graduate student tuition remissions are taxable if the student getting the money is required to teach or work as an RA.

This was a huge controversial element in the original drafts of the new tax legislation, was discussed as totally new in the media, and was NOT included in the final legislation, again, according to the media accounts that I have read.

Clearly, I’m missing something. Do you know what that might be?

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@profdad2021 - I linked to https://www.irs.gov/taxtopics/tc421 – can you quote the part that is confusing to you? I only see a reference to scholarships and grants, nothing related to tuition remissions.

A scholarship or grant is money which can be used to pay tuition - the tuition is still billed, but the scholarship funds are used to pay the amount.

A tuition remission is a discount or a waiver. It may have the same net effect, but conceptually ver different.

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I don’t think a stipend for research should be taxed as self employment income. Unless it is reported as such and uses box 7.

@Mom2aphysicsgeek, your son had REU stipends, right? Did he get a 1099 misc and what box was it reported in?

We are not tax professionals either. So ultimately you have to rely on a tax preparer or tax softwrare because it is YOU who signs that return with your name.

@calmom, my D had a campus job, and no FICA taxes are due on that. But federal and state taxes are withheld.

https://www.irs.gov/charities-non-profits/student-exception-to-fica-tax