New Tax law on Taxable scholarships

https://www.irs.gov/instructions/i8615#idm140023474969936

Yes but you’re missing the point. Yes you tally your unearned income on Form 8615.
BUT then you compare it to your taxable income on your actual tax form and you use the LOWER amount to determine kiddie tax owed. Have you looked at the actual Form 8615, not just the instructions, to see how it flows?

You calculate “x”
You enter “y”
You use the lower figure to calculate tax owed
Tax on 0 is 0.

In my example, let’s say earned income is $3,000, scholarship is $9,000.
So on Form 8615 you enter $9,000 minus $2550 (in 2018) = $6450 (this is “x”).

That’s the FIRST part.
Then you fill in your taxable income from your own tax form which in this case would be ZERO (this is “y”)
.
Then you use the LOWER amount to calculate any kiddie tax.

I allow for the possibility that Congress could change this process, but my D and I have already filed taxes with this exact situation. And we ran it through two reputable online tax programs, same result. The only theoretical part of what I’m saying is that Congress could change anything they want between now and filing time for 2018.

I’m not a CPA but I did prepare taxes through a volunteer program last year. And since we did it on a college campus, I became very familiar with how student financial aid plays out on tax returns. Everything I’m saying can be verified (at least for current tax year) by looking at both the instructions for Form 8615 and the form itself.

Yes @alooknac I understand that. It worked like that for my D on the last two tax returns.

Taxable scholarships were both earned income for the standard deduction AND unearned income for the kiddie tax.

My previous post was in response to @calmom

Sorry, I forgot to tag calmom in that post and it took me a while to find the citation from the tax rules so it looked like replied to you.

For 2017 (no one knows about 2018 specifics yet) the standard deduction in your example, for a dependent, is limited to earned income plus $350, which is $3350. So taxable income is not zero. ($3000 earned + $9000 taxable scholarship - $3350 standard deduction is not zero taxable income).

I agree that all non-QEE is subject to tax. I do not find an exception for Pell or other federal grants like SEOG. My daughter paid tax on hers, so if there is an exception, I’d like to know about it. Service Academy students pay tax on their salaries as military people, so room and board is treated differently (employer requires employee to live in military housing, etc)

@Madison85 Yes, but taxable scholarship counts as earned income for the purpose of figuring the standard deduction.

My D had earnings of $3,000 and taxable scholarships of $4,000 and the whole $6,300 standard deduction was deducted from her combined income.

If the volunteer program is sponsored by IRS, the form 8615 would be out of scope.

Ahhh. Ok. Taxable scholarships are unearned for Form 8615 BUT earned for standard deduction amount calculation.

I wish the Congress would remove taxable scholarships from unearned income. Why would the Congress tax students up to 37% on the money that most students will not see or touch.

Does anyone recommend a “canned” tax software that would handle this issue? Turbotax? H R Block?

@profdad2021

IIRC, Turbo Tax has the questions to tease this out.

Personally, I won’t support anything HR Block markets…but that is personal opinion.

@thumper1 is correct, according to my dh, Turbo Tax handled the scholarship taxes correctly for my DD last year.

So what’s Turbo Tax Deluxe versus Turbo Tax Premier? Premier keeps one out of jail?

https://turbotax.intuit.com/taxfreedom/

Actually for students you should be able to use Turbotax Freedom Edition, it was free for AGI up to $30,000 I think last year.

You have to make an account and always sign in from the Freedom Edition website. Otherwise it wants you to buy whatever version covers the forms you need.

My D was able to efile Federal and PA return for free with it last year.

I think it asked if she had education expenses after she said she was a full time student.
Then it walked you through an interview and had us enter numbers from the 1098T (you will have to check if it’s correct).

^this is not the same as the Turbotax “free” product or basic, not sure what it is called. Because that one only supports 1040EZ, and with form 8615 for kiddie tax you need 1040A I believe.

@mommdc, the TurboTax freedom supports either 1040EZ or 1040A, although I’m not sure if form 8615 makes the return too complicated for the free version.

@traveler98 I went and checked, and you are right, it says that Turbotax “free” (“absolute zero”) supports 1040EZ and 1040A.

Maybe it was different a few years ago when I first tried it, but I thought only filing 1040EZ was free.

I just always use the “Freedom Edition” for my kids now.

I’m see glad this was all “simplified”:slight_smile:

Yep, when my kid is 19 with likely just a small amount of earned income and some taxable scholarships and no dependents or investment income, he STILL won’t be able to file his tax return “on a postcard” like that stupid prop the lawmakers have been showing at press conferences.

HRSMom, everything being discussed here is the current version, before simplification!

TaxAct works and allows 1040Ez or 1040A (had one kid on each form). Last year I tried to use TurboTax, for free, and I was having a lot of trouble but I think it was trying to pull info from another return filled out on the same computer. Turbo Tax wouldn’t provide a free form I needed, so I switched to FreeTax or something like that, and it was fine for mine, but then when I put in my daughter’s, it wouldn’t to 8615 for her, so I switched to TaxAct for her. I was so frustrated and it took me three nights to do three returns that were all fairly simple, with standard deductions and just those two extra schedules.