New Tax law on Taxable scholarships

@traveler98 the good news is no state tax in TX! DD that goes to OU has to pay OK state tax on her school taxable scholarships. Thankfully it’s not much.

What kind of expenses are you asking about? If 529 money is used for something that is not a qualified education expense, the earnings portion of the 529 funds would be subject to income tax. The 10% additional tax can be waived to the extent that tax-free scholarships were received by the student and used to pay for expenses that are 529 QEE.

@BelknapPoint of course I’m talking about qualified expenses, in this case room and board. Tuition, fees and books will all be covered by non-taxable scholarships. In my example above, the $10,000 expense I mentioned is all qualified expenses past tuition, fees and books.

Well, I’m sorry then. I’m confused by your scenario and your question. Perhaps it would be easier to understand if you were to list specific expenses by item and amount, and then how each of those expenses was paid.

@3scoutsmom - The applicable provision can be found here: t https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.xml

Do a CTL-F to search the page for “SPECIAL RULES FOR CERTAIN CHILDREN WITH UNEARNED INCOME”.

I think the calculation in the first post is pretty close to what the tax would be. So the difference in value between the two scholarships (McDermott and NM) is $5800 annually, but with the NM scholarship your son would be free to work during the school year and summers – and given that the NM is a near full ride, it would also enable your son to become independent.-- and able to claim the $12K standard deduction. (You would have to restrict any financial support to less than half of your son’s earnings… but your son might not need money from you.)

However, if the McDermott effectively guarantees paid summer internships, you might want to find out what those internships typically pay – because that could also be enough to tip your son toward non-dependent status. He is only a dependent as long as you are contributing more than half of his support, and the scholarship money can’t be included in that calculation. So any earnings at all really would be enough to allow your son to become independent for tax purposes, as long as you stop giving him money. (I think in theory even without a job, a kid with -0- parental support would be independent).

I think that it might be worthwhile for you to write to the administrators of the McDermott to raise your concerns – they are gong to have to address this sooner or later. The restriction on taking paid employment during the duration of the scholarship raises some potentially complex legal questions about how the money is characterized. Some grants are reported as schedule C income rather than scholarships because they are tied to work – and in that case it is characterized as earned income (no Kiddie tax). So I am being creative here, but I’m wondering if the restraint on employment be viewed as a service being provided to the university?

In the past, REUs have also been treated like scholarship $$, so if your child will be pursuing REUs vs employment, that $$ also cannot be claimed toward self-support and adds an additional $5000+ amt to the unearned income scholarship amt exceeding QEE.

Yes, and we had a discussion here before about full ride students being able to file tax independently (not be claimed by parent), to reduce their tax burden, and the kiddie tax provision said something about them being subject to the kiddie tax unless they had earned income of more than 50% of their support.

That can be hard to achieve for a student who has a full ride to pay for all education costs, plus does REUs or unpaid internships, so no or very little earned income.

And in such a situation where the education cost is covered by scholarship, the parent might still provide more than 50% of support, if the student is on their health insurance, if they feed and house them at home in the summer, pay for phone or car insurance, etc.

It’s complex, and as @Mom2aphysicsgeek knows, not all CPAs are familiar with the ins and outs of these rules.

And now, since exemptions are going away, is there still a distinction between a single filer who is independent of parents and one who is dependent? Is their standard deduction different?

But apparently now the standard deduction does not apply to unearned income?

These are two questions I have been asking myself.

@3scoutmom For 2018 when the new tax rates for children’s unearned income become effective, would your son only have one semester of scholarships?

https://www.irs.gov/taxtopics/tc553

When the Tax Reform Act of 1986 was passed, it took 11 months for technical corrections to come out. It could be awhile before any issues with this new tax act are fixed.

Luckily we 2018 parents will only have one semester’s worth of scholarship to deal with in 2018, and hopefully things will be more clear for the 2019 tax year.

Also, I’m not sure how much this matters but I believe UTD pays the non-accountable stipend portion of the scholarship directly to the student and does not automatically apply it to the student’s university bill. Well, at least that’s what they do for the lower-level AES scholarships (stipends of $3000 per semester at most). I don’t have first hand knowledge of the disbursement method for NMF or McDermott but it would make sense that all stipends are treated the same way.

@calmom and @mommdc, thank you for your contribution to the thread, I’m finding your links and info quite helpful. Regarding the McDermott work restriction and internships, the program doesn’t guarantee a paid internship but students are free to pursue internships that meet educational goals. They aren’t allowed to take jobs such as babysitting or mowing lawns just for spare cash, although I suppose if a student were majoring in something like early childhood development a nanny/babysitter job could possibly be accepted as promoting the educational goal of the student.

I view the tuition and fees vs the scholarships as a wash. I’m not paying those things so can’t be counted as support I provide. Then what is the ‘cost’ of daughter, how much is her support? It’s her meals, rent, insurance, about $700/mo. She pays all that through her loans and summer earning. I’ve never heard of the IRS auditing a parent for not taking a deduction nor of the IRS going after a student because the student claimed to be self supporting. Maybe after a child who didn’t take the kiddie tax correctly for stock and bond payouts, but not a student claiming $10k in earned income and another $10k in unearned.

Granted, the scholarships only became unearned and subject to the kiddie tax about 4 years ago, so maybe the IRS has a bunch of files they are getting ready to audit, but I really doubt it.

Just some comments based on my own situation and looking at the available documents for the new tax law.

One thing I don’t see mentioned in this thread is that the tax is based on NET unearned income. I looked at D’s return for 2016 to see how that worked. And maybe for OP’s child this is irrelevant because he can’t have any earned income? But maybe it will apply and/or be helpful to someone else. Most college kids have some wages. Maybe some of the stipends and such that OP’s child might get are treated as earned income for tax purposes.

In TY2016, my D’s unearned income above $2100 (the trigger point for kiddie tax) was compared to her taxable income ($0) and the lesser amount was her “net unearned income.” She had a job and we declared enough of her scholarships taxable to equal the standard deduction of $6300 (2016), resulting in taxable income of zero. So even though we declared some scholarship money taxable, it didn’t actually result in any tax.

And if under the new law, college kids who are dependents get the same increased standard deduction as everyone else($12,000), in TY2018 we may be able to declare a lot more scholarship taxable and not actually have to pay any tax on it. That would allow me to claim a larger AOTC.

The devil is in the details and personally I wouldn’t count on anything. I was just trying to get some idea about how this might affect my own family in TY2017.

Thanks @alooknac. I’d somehow been thinking that the standard deduction only applied to earned income and that 100% of unearned income is taxable even if the student has no earned income at all.

@Madison85 could you read this?

It seems very contrary to other posts about the same subject.

FWIW, I used a reputable commercial online tax prep service, and I actually used more than one as a cross check.

Look at form 8615, it explains how the calculation of kiddie tax works.

But for 2018 I expect it will be different, since the tax rate will no longer be based on parent taxable income.

I looked at the new tax bill and the only change I see is that instead of using the parent’s tax rate, the estate/trust tax rate will be used. This was in the name of simplicity as the current system means the child’s tax rate is intertwined not only with their parents’s but also their siblings.

I did not see any change in the definition of unearned income or net unearned income. I did several searches of the document.

I’m not by any means saying I’m somehow an expert, just reporting what I saw & comparing it to our own last year’s taxes.

@alooknac I think the issue is there are no personal exemptions anymore. So the taxing starts at any unearned portion that exceeds $2100. The standard deduction is not counted against unearned wages. As I calculate, for a student who gets $20,000 in Room, Board, Travel and research Stipend from a scholarship, he or she pays $3,011.50 base + (20,000-12,500) *.37 = 3011.50+3145 = $6,156.50 in tax. Also if the student gets health insurance as part of their scholarship, that also counts against unearned interest. The only way for an under 24-year old student to not pay this tax is (1) to have no living parents, or (2) for that student to earn over half their needs, which for our hypothetical student above would be to earn in a job over the $20,000 that has been provided via scholarship.

As far as I can tell, no low income student will be able to afford a full-ride scholarship unless he or she can work a lot on the side to earn enough for tax.

Can anyone say how this calculation is off?

Publication 929(2016):

Standard Deduction
The standard deduction for an individual who can be claimed as a dependent on another person’s tax return is generally limited to the larger of:

$1,050, or

The individual’s earned income plus $350,

but not more than the regular standard deduction (generally $6,300).