Paying taxes on scholarships (over QEE)

Paying for College
1

<p>We were very fortunate that son earned several scholarships and was given grants that cover nearly all of his schools COA. However we will have to pay taxes on a large part of those scholarships. Annual tuition is $6000 and COA is $21,000. On top of that son earned $2000 this summer in wages and another $500 as an independent contractor. I am a single parent and am in the 10% bracket. I read on cc that the rules changed and the scholarships over QEE are now unearned income and have to pay the higher rate kiddie tax. I usually file with a free service and don't have an accountant so I am looking for advice as to how much money we need to set aside for taxes. Also can I still claim him as a dependent? What about the tax credits for QEE? Does he claim them or do I or are we eligible for them? Once I claim my exceptions I never have to pay taxes. Taxes are so confusing and looking at IRS examples different ways to file can result in paying less/more taxes. </p>

2

<p>IRS Pub 970 is the main reference if you haven’t looked at it.</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf”>http://www.irs.gov/pub/irs-pdf/p970.pdf&lt;/a&gt;&lt;/p&gt;

<p>Chapter 1 is the taxable scholarships/grants, chapter 2 the AOTC and chapter 8 is relevant if you are considering using any 529 or Coverdell funds.</p>

<p>He will need to file a return. You can claim him as a dependent if you provide over half his support. Scholarships/grants don’t count as support he provided himself, they are considered provided by a 3rd party. He will get his standard deduction of around $6100 before the income is taxable. You are correct about the kiddie tax but if you are in the 10% bracket that should be irrelevant, his bracket will determine the tax he pays. The kiddie tax means he has to pay at the higher of your or his rate, not a special higher rate.</p>

<p>Scholarships/grants are taxable to the extent they exceed the cost of tuition, mandatory fees and required books and supplies. So the amount that went toward R&B is taxable. Coordinating this with the AOTC is more complicated. SInce it sounds like you have very little out of pocket expense that you have paid, you may not have any expenses for the AOTC. How much did you or he actually pay for anything. If there is any AOTC to be claimed, you would claim it.</p>

3

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The free service should still able to handle your taxes. I think you should set aside for his taxes: 10% - 15% *(taxable incomes - $6100) + 15% * 500 (this is his SE taxes). You may want set aside another 5% for his state taxes. See a tax expert for more accurate estimates.</p>

4

<p>Adding that the tests to claim a qualifying child start on page 13 of IRS pub 501. There is a support worksheet you can work through for that test.</p>

<p><a href=“http://www.irs.gov/pub/irs-prior/p501--2013.pdf”>http://www.irs.gov/pub/irs-prior/p501--2013.pdf&lt;/a&gt;&lt;/p&gt;

<p>Also adding that even though the kiddie tax shouldn’t affect his tax rate, he needs to file form 8615 with his return to demonstrate that.</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/i8615.pdf”>http://www.irs.gov/pub/irs-pdf/i8615.pdf&lt;/a&gt;&lt;/p&gt;

5

<p>YOUR SON will have to pay the income taxes on his job earnings and the surplus scholarships (and total COA doesn’t matter; room and board are not allowable expenses). You can still claim him\ as an exemption on your own taxes. And yes, he should send in quarterly estimated payments for the taxes he will owe for the excess scholarships. He will not owe Social Security taxes on the scholarship money as it is unearned income.</p>

6

<p>Estimated payments may not be necessary. Here are some exceptions to the penalty for under withholding. He may qualify for one of the exceptions, especially if fall will be his 1st semester and he only has one semester for 2014 taxes.</p>

<p><a href=“Topic No. 306, Penalty for Underpayment of Estimated Tax | Internal Revenue Service”>http://www.irs.gov/taxtopics/tc306.html&lt;/a&gt;&lt;/p&gt;

<p>If fall is going to be his first semester, you may only have the one semester’s grants/scholarships for 2014 taxes. It is going to matter if any scholarships/grants are credited in December or earlier for 2nd semester and if you actually pay any expenses in December or earlier for 2nd semester. Any scholarships/grants credited to his account in January or any amounts you actually pay in January will be for 2015 taxes.</p>