I look forward to hearing what @Mom2aphysicsgeek learns, and am kind of glad to hear we aren’t the only ones who are confused by this
I used HRB software to file for D and while I did put in the amount she was taking as taxable scholarship, HRB put that amount on line 1 of her 1040EZ, included with her earnings from work. Not on an investment line. She was taxed at her rate, and it was well over $2000.
I just went back into the interview portion and this is what it says:
The scholarship “Learn More” popups says:
It doesn’t address earned or unearned income or kiddie tax, but it puts it it with wages on the return.
@ClassicRockerDad the wording is pretty clear on the AOTC. If a student CAN be claimed as a dependent, it doesn’t matter whether or not you choose to claim her; she is ineligible claim the AOTC.
I am reviewing my inputs for our HR block generated tax returns, but the software definitely recognized that my daughter had more than $2100 in unearned income and calculated the kiddie tax.
I completed my return first and did hers, all on HR block, and claimed her as a dependent on my return. On her return, she got the standard deduction but not the extra exemption for herself, since she was claimed as a dependent on my return.
She will not claim her own exemption. My understanding is she still qualifies for AOTC but can’t claim a refundable credit. So for example, suppose her income were $5000. Her standard deduction would be $1050 and has no tax. The second $1050 is taxed at 10%=$105. The remainder ($5000-$2100=$2900) would be taxed at our rate, say 39.6% = $1148.
So her tax would be $105 + $1148 = $1253.
I think she should be able to get an AOTC for $1253 but she couldn’t get the whole $2500 because to get a refundable credit, she would have to provide 50% of her support.
in the HR block questions about income, I checked off scholarship income(taxable) near the bottom of the list called “other income” for my daughter’s return. Since for her, that amount exceeds $2100, I believe that is what triggers the other questions about the scholarships and calculations of the kiddie tax.
For the kiddie tax to be calculated for your daughter’s return, your tax return must be completed first so that your income and tax info can be used to compare tax owed at her rate and your own. She pays tax on the higher of the 2 rates.
We did not put her taxable scholarship info into the W2 section, it is reported in the “other income” section of the questions, you need to scroll all the way down to see the box for scholarship income
On the form 8615 on line1 it asks for unearned income
Then on line 2 it subtracts $2100 = net unearned income on line 3
On line 4 it asks for child’s taxable income, line 27 form 1040A, line 43 form 1040
On line 5 it asks for smaller of line 3 or 4, and says if $0 to stop
Is that $5,000 income from taxable scholarships/fellowships? If it is, her standard deduction is at least $5,350, because for the purpose of figuring the standard deduction for a dependent, taxable scholarships and fellowship grants are considered to be earned income. See IRS pub. 17, pg. 139 (bottom of first column):
Interesting. Nice find. Sure seems like the proceeds would be taxable and count as earned income, then get wiped out via the standard deduction of all earned income.
I wonder if it being earned income would make it subject to state taxes in the state she does the REU. That could be a royal pain. She won a prize a few years ago that wasn’t taxed locally, but she worked as a tour guide and they withheld state and local taxes.
Many cities tax professional athletes that play in that city for the day. Football players get taxed on the amount they earn for that game in Philly, and the city considers they earn 1/16th (I think that’s it) of their pay on that day. I don’t know how they do bonuses and all.
I think it is likely the student who preforms the work in City A but lives in State B may be taxed by City/State A.
To the OP, there are times under the tax code that no one gets to take the deduction, exemption, or credit. An easy example is the family that has plenty of room under the QEE to take the AOTC but the family makes too much so no one can take the AOTC.
An example of a child having no personal exemption is where a child lives with several relatives during the year but no one at least 50% of the time or no one relative providing more than 50% of support. Foster children that move around a lot may be in this position. Not always, but sometimes.
This may be a case where the parents can’t take the exemption, the child cannot because he doesn’t have enough earned income, and to throw more salt on the wound, the ‘child’ who is an independent adult, gets taxed at the kiddie tax rate. Totally unfair.
I have nothing to add but that it makes me feel better to see others have found this confusing too. Thank you for all your input here; we are in much the same situation with our two oldest.
@twoinanddone I am beginning to think that is where we will land. We can’t claim bc based on the dependency worksheet, we do not provide 50% of his living expenses and he won’t be able to claim himself bc he doesn’t have earned income. It is really no man’s land.
But I really doubt it would be questioned if you did claim your full time, under 24 year old son as a dependent. You could justify it with the health insurance, car insurance?, food, etc. If his total cost of living is, say, $30k per year and you back out all the costs that are covered by scholarships, his total COL may only be $2000 or so. You could probably figure out a way that you paid $1000. Yes, your health premium is the same if he is on it or not, but you could still justify his cost as being 1/8th of the total premium, and 1/8 of other household costs too.
