@Madison85 Aren’t we discussing the new tax rules currently? The ones just signed? I don’t think a standard deduction applies to unearned interest under the new rules.
Responding to #54 which was about TY2016.
So now that the tax will be based on estate/trust rates rather than the parent’s rate, this means every kid on the basketball and football team is gonna be paying 4-5 grand a year in taxes?
@psycholing A student does not need to earn more than half of the cost of their support to be independent. The test is the other way around; the student is dependent if the parent contributes more than half of the student’s support, not including the scholarship. So if the parent contributes 0, then the student would not be a dependent. If the student has a summer job and earns $3000, and the parents contribute $2500, that also is less than half, and student is no longer a dependent.
It has been correctly pointed out that parents ’ payment of expenses like health insurance and room and board over summer months has to be factored in…but on the lower end of the economic spectrum, many parents can’t afford that and really don’t contribute money or provide other support during college years.
I don’t like badly written tax laws that encourage people to manipulate their finances to play games, but if a kid has a bank account in their own name with money accumulated from previous tax years, and the kid has a full ride scholarship with a stipend, then that kid really can get by without parental support during the college years. So maybe the middle and upper middle class families whose kids are in line for substantial taxable scholarship money need to restructure finances during college years to make that happen.
I don’t really know the ins and outs. My kids had need based financial aid only, but one of my kids was legitimately self supporting at age 20, and at least in my state my legal obligation to support my kids ended the day they turned 18.
I would have been reluctant to allow my kids to sign onto a scholarship restricting their ability to work even without tax concerns, but in the end it still is a matter of tallying the numbers and making a decision. If the parents are financially capable and had planned to pay for their kid to attend college, maybe it is just as easy for the parents to pay the child’s tax and be grateful for the scholarship. After all, the amount of tax owed is still only a fraction of what the parents would be paying the college bursary if the student has not qualified for the scholarship.
@calmom I have been reading up on this in the past two days, and although I am no tax expert, I believe you are incorrect. The test you are discussing is if the parent provides half of the support for the student, the PARENT can claim the student as a dependent. That is oblique to the issue of kiddie tax.
The test under kiddie tax eligibility is a different test. That is – does the student provide half of his/her own support via wages. See, for example, this link: https://www.bogleheads.org/forum/viewtopic.php?t=71981
As discussed elsewhere on CC, it is possible for a student under the old rules to have no dependence and yet to still be not considered independent enough to pay the kiddie tax. That is, the student could have no contact whatsoever with parents, and not receive a cent from them, and still have to pay the kiddie tax. Imagine, for example, a student who is a Rhodes Scholar and who receives room and board at Oxford, travel funds to the UK, and a stipend. Those expenses could add up to, let’s say, $30,000 a year. Unless the student makes over $30,000 in earned wages in the same year, that student would be paying kiddie tax on that amount. This tax bill is due even if the student was a run-away and hasn’t had parental contact in years.
These new rules appear to be absolutely ridiculous. But I have researched this thoroughly and I can’t find where I am misinterpreting it.
I am sorry, but bogleheads.org is not an authoritive source.
The language you are looking at about the child’s earned income comes from IRS publication 929, and the introductory paragraph says that publication applies only to children who are dependents.
So if the college age child is not a dependent, none of the rest applies. The independent student takes their standard deduction and pays ordinary taxes based on their own rates.
Also I think you are misreading the language about “excluding scholarships”. I interpret that to mean that for dependent students, the scholarship is not to be counted against the parent contribution in meeting the dependency test, not that a student who earns more money than his parents provide also has to earn more than the scholarship amount in order to file as a single taxpayer.
I am not an expert in this, but you would need to cite to a statute, IRS regulation, publication, or opinion letter, or a court ruling to convince me otherwise. I could very well be mistaken, but I don’t go to bogleheads for tax advice.
I understand how confusing the tax rules can be, but you are citing to an online forum from 2011 dealing mostly with investment income, and even there the forum participants disagreed with one another.
@calmom I could list a lot more citations, but I can’t help but notice you cite nothing at all to back up your interpretation. How about you show me a citation that that the student’s kiddie tax status is based on how much support the parent confers? I bet you can’t find one.
What I see is that IRS publication 929 says “Part 2 explains how to report and figure the tax on unearned income of certain children (whether or not they can be claimed as dependents).” So your interpretation appears to ignore the second part of the document.
Part 2 then goes on to define who is required to fill out the form to pay the kiddie tax.
This quote is from the 2016 version: https://www.irs.gov/publications/p929#en_US_2016_publink1000203846
“When Form 8615 must be filed. Form 8615 must be filed for a child if all of the following statements are true.
The child’s unearned income was more than $2,100.
The child is required to file a return for 2016.
The child either:
Was under age 18 at the end of the year,
Was age 18 at the end of the year and didn’t have earned income that was more than half of his or her support, or
Was a full-time student at least age 19 and under age 24 at the end of 2016 and didn’t have earned income that was more than half of the child’s support.
At least one of the child’s parents was alive at the end of 2016.
The child doesn’t file a joint return for 2016.”
Nothing in this description states that the student’s status depends on level of parental support.
@calmom I wish your interpretation was correct, but our understanding is that @psycholing’s is bc of “was a full-time student at least age 19 and under age 24 at the end of 2016 and didn’t have earned income that was more than half of the child’s support.”
We have contributed $0 toward our college student’s support since his 2nd semester freshman yr. He is on our health insurance, but it is a family plan and there is no difference in cost to us whether he is on it or not bc 6 of his other siblings are already on the plan.
He has scholarship $ covering all room, board, and books. He has participated in summer research with stipend every single summer, including after his freshman yr, and has had a stipend of at least $5000/summer, plus room and typically a food stipend as well. Research experiences are considered scholarships, not employment. But, he cannot claim scholarship $$ toward his support. So he has $0 toward his self-support even though we are not supporting him. His health insurance basically is more than $0even though for us it may as well be $0.
He spends less than his scholarship and his summer research $$ bc he is very frugal, so he has put $$ in the bank. (Quite a bit actually.) We have paid approx 25%+ of his post-tuition scholarship/research $$ in taxes every yr even with his being able to claim his personal deduction. Based on the new calculation, it looks like we wiould pay about $1500 more than we were (Basically his summer research plus more…I don’t see how poor kids will be able to participate in research vs working during the summers. The tax rate was based on parental income, so our rate has always been high.)
We have been claiming his entire scholarship for the yr at the end of fall semester’s tax yr. Whether or not what we have been doing is correct, I am not sure. We cannot find any accountant who knows anything about scholarships exceeding QEE. When I talked to several, a couple even tried to tell me that scholarships are not taxable. Sigh. I knew more about the issue than they did and I don’t even know a pin-head’s worth. Anyway, bc of the way we have been filing and this being his sr yr, the new law won’t impact him as an UG bc we will be paying his entire tax bill based on 2017’s tax law. Unless of course we have been doing it wrong and are audited. (But at least we have been paying it vs treating it like it isn’t taxable (we know a couple of families that have been treating scholarships like they aren’t and have told us we are incorrect. Apparently some accountants are that behind in understanding tax changes. Even Turbo Tax eventually caught up.)
His sister, otoh, is a freshman. Her scholarship is not quite as large, but it looks like we will come out about the same financially bc we won’t be paying so much of it in taxes and the taxes make the difference a wash.
@Mom2aphysicsgeek oh my gosh, yes. Remember my CPA looking at me and saying, in essence, huh? D had scholarships in excess of QEE, she had a summer research treated like a scholarship, and we elected to make some more of her aid taxable to claim the AOTC. This year will be better because her summer work was a paid internship, not research with a stipend. TY 2016 I did my best. I’ll continue to do the same, and just hope like heck the IRS has bigger fish to fry than college students who paid taxes at their own rate.
My post #46 addressed students with full ride scholarships, which cover full COA and maybe even more.
Their tax situation is even more complex because of dependency rules and kiddie tax rules.
I quoted the tax rules for the kiddie tax in post #47 and it expressly says that kiddie tax applies unless the student has earned income of more than 50% of their support (not counting scholarships because they can’t be used when figuring support)
If you read the support rules it clearly says that the student has to spend their own money on the support.
So even earning the money alone is not enough.
It is a very complex scenario.
And the parents here want to understand how it works.
I was in the situation of @alooknac where my D had some earned job income and taxable scholarships. The calculation worked out the same as hers. My D’s combined income was reduced by the $6,300 standard deduction and then the lower of her taxable income and net unearned income was subject to the kiddie tax.
We could also claim my D as a dependent because we provided all other support that the scholarship didn’t cover. She had earned income but didn’t spend it all on her own support.
But this is not the same situation as a family with a full ride scholarship and no or very little earned income.
Their situation is extra complex and now with the new tax rules we really don’t know how it’s going to affect them.
A family who can cover the tax on scholarships because everything else is covered is one thing, but how about an athlete or a $0 EFC student from a family who can’t help out?
The student athlete might not be able to work and the $0 student probably has a student contribution even at meets 100% need colleges, which might cover their personal expenses, but not the taxes.
Let’s hope that both will be true of the new law to reduce their tax burden:
The student gets a $12,000 standard deduction irregardless of the parent claiming them as a dependent or not, and the standard deduction can be used to offset their combined earned and unearned (taxable scholarship) income, before the trust tax rates apply to the (net) unearned income.
I guess we will have to see how it plays out since none of knows for sure how it will work.
@Mom2aphysicsgeek I remember talking in depth about your complicated situation.
I just don’t understand why the taxable scholarships are lumped in with investment income from trust funds.
I read the TCJA a few times, and I don’t think the new law changed anything on the dependent’s standard deduction:
@4kidsdad let’s hope that is indeed the case going forward.
The taxable scholarships count as earned income for the purpose of determining standard deduction and requirement to file a tax return in the current rules, so hopefully it will stay that way.
I better back that up with a citation:
https://taxmap.irs.gov/taxmap/pub17/p17-102.htm#TXMP3fc97f70
When, how, under what circumstances would a college scholarship be taxable?
@thumper1 So a scholarship is taxable if it covers part of room and board?
@fidoprincess Where/how do you know that ANY scholarship that covers more than tuition and fees would be taxable? So a student would not be allowed to get scholarship money to cover room and board without paying taxes on it?
@mommdc has already posted the criteria for the tax liability for scholarships covering room and board…but maybe she will do so again…with a short explanation.
@profdad2021 so far as I know…at least since my own kids were in college (2003-2010) scholarships in excess of tuition, fees, book, are considered taxable.
Your kiddo would receive a 1098 T from the college…it would list scholarships awarded…and the amount that are QEE. You keep track of books.
@thumper1 I have NEVER heard of this. I’d guess that most people have never heard of it. Don’t have a clue if it affects us but we will look into it.
As noted above…if your kid receives a scholarship, the kid will also receive a 1098T which outlines the scholarship awarded in the tax year plus the allowable expenses.
Do you have a current college student with a scholarship?
An older college student kid got one of those forms but it was convoluted - the school did not list all expenses/scholarship for the same year. Given that, I can’t imagine how anyone could have used the form for tax purposes. But for us, fortunately/unfortunately, the dollars did not exceed tuition.