<p>Having same problem with HR Block tax software as everyone else. I know it didn’t do this last year. After reading the IRS publications, I agree that the taxable portion of my son’s scholarships shouldn’t be treated as investment income for the Kiddie Tax - Form 8615:</p>
<p>Investment Income:
For Form 8615, “investment income” includes all taxable
income other than earned income as defined later.
Investment income includes taxable interest, ordinary
dividends, capital gains (including capital gain
distributions), rents, royalties, etc. It also includes taxable
social security benefits, pension and annuity income, and
income (other than earned income) received as the
beneficiary of a trust.</p>
<p>No mention of the taxable portion of scholarships as investment income which is probably a lot more common than the most of the other items listed (e.g., rents, royalties, pension, etc.). </p>
<p>The “simple” fix:
Go directly to the Form 8615 in the software
Find the line 1 where it shows investment income
Right click on the amount and select “Override”
Enter zero
Done</p>
<p>Only problem with this is that it won’t let you e-file when you do an override, so I’ll have to print his out and mail it the old fashion way.</p>
<p>It has been over 4 weeks since our issue with HR Block and the taxable scholarship income triggering Form 8615. It is now April 15, do they think we are still just waiting for them to call back? LOL </p>
<p>With this issue and the lack of customer support, it is good bye forever to HR Block.
To anyone else that deals with them, DO NOT let them tell you “that’s how it is supposed to be” to get you off the phone.<br>
See the links provided by swimcatsmom, and let them keep escalating to the next higher representative, and if anyone gets a sensible response/answer, please update here.</p>
<p>My daughter’s taxes were impacted by this issue. After researching it, it appears to only impact 2012 H&R Block users who filed a tax return for a child who was still a dependent AND had taxable scholarship income. When determining the amount to go on Line 1 of Form 8615, H&R Block appears to improperly subtract only wage income from total income. It should subtract whatever is on 1040, Line 7 from total income. The effect of this is that taxable scholarship income gets lumped in as investment income and taxed by Form 8615 rules (resulting in a sizable overpayment in taxes). H&R Block did not calculate Form 8615, Line 1 this way in 2011, 2010, or 2009.</p>
<p>The only way out is to manually override the number on Form 8615 Line1 which voids H&R’s warranty, guarantee, whatever…</p>
<p>Has anyone gotten a satisfactory answer from the IRS or H&R Block about why H&R suddenly changed the method for calculating Form 8615, Line 1?</p>
<p>Do any of the other tax packages treat taxable scholarship income this way?</p>
<p>It took over a month of back and forth calls between me and H&R’s Tier 2 Escalation Support, but I finally got an answer as to why they changed their calculation for Form 8615, Line 1. If you want the details leading up to this, my previous post in this thread covers it.</p>
<p>H&R told me that the IRS had them change the 8615, line 1 calculation based on Publication 929, page 16, Column 2. The relevant paragraph starts with “Investment income defined. Investment income is gen- erally all income other than salaries, wages, and other amounts received as pay for work actually done.”</p>
<p>Evidently, H&R believes that taxable scholarship income is not pay for work actually done and is thus unearned income (or investment income). They claim to have a clarification from the IRS that states they are doing the right thing.</p>
<p>I pointed out that:</p>
<ul>
<li><p>Publication 929, page 7 also states “Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in income.”</p></li>
<li><p>H&R did not process this calculation this way in the 2009, 2010, and 2011 tax years. The part of Pub 929 they are quoting remained the same all those years. Does this mean that H&R has a slew of customers who filed incorrect tax forms? They responded that if the IRS challenged the tax form from 2009, 2010, or 2011, they would cover all penalties and interest.</p></li>
<li><p>students with National Science Foundation fellowships are actually being paid to do research at their respective institutions. But, the NSF doesn’t issue W2s. Since they don’t issue W2s, the taxable portion of a NSF fellowship ends up in the taxable scholarship income category even though the students are getting “paid for work actually done.” </p></li>
</ul>
<p>I’m not arguing with anyone’s stance on this issue. I’m just reporting the back and forth with H&R. I’m considering filing with the Taxpayer Advocate Service to get an IRS response.</p>
<p>The new form (DEC 2013) from the IRS explicitly clarifies the issue. " For Form 8615, “unearned income” includes all taxable income other than earned income as defined later. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.’ It appears that HR Block was indeed correct in their interpretation. I am not happy because we are getting socked with a sizable bill. But, no one said that the IRS rules are the fairest or the easiest to comprehend.</p>
<p>It appears H&R Block may have jumped the gun by a year. The post above yours gives the 2012 instructions which even the title is Investment Income vs. Unearned Income. Are you using H&R Block for 2013? Is that why your seeing the sizable bill? My software hasn’t done this for my son but I’ll have to double check it. There is an exception if the student is over 18, under 24 and had earned income that was over half his support. Due to an internship he had that much earned income, though he didn’t spend much of it on his support. And the scholarships he received don’t count as support he provided himself.</p>
<p>I think we still safe from the “Scholarship as Investment Income?” for 2013. The 2013 Pub 17 Chapter 31 Section “Tax for Certain Children Who Have Unearned Income” define Unearned Income differently.
<p>What in the section you quoted contradicts the more explicit new 8615 instructions that makes you think ‘we are safe’? I think taxable scholarships/grants easily falls under the phrase ‘Unearned in-come is generally all income other than salaries, wages, and other amounts received as pay for work actually done’ given the new 8615 verbiage. Your quote gives a list of what is included but doesn’t say it’s an exhaustive list and doesn’t exclude scholarships/grants specifically.</p>
<p>Just like there are different definitions of “qualified education expenses” depending on whether you are talking about 529 distributions or the American Opportunity Tax Credit, so too are there multiple definitions of “earned income.” The definition in Pub 17 table 1-2 is used to determine filing requirements for dependents. The glossary definition in Pub 929 pertains to determining a dependent’s standard deduction. What really matters is, for purposes of determining how a child’s income is taxed on form 8615, what the instructions for that form say. And new this year, it’s very clear that taxable scholarship and fellowship grants must be treated as unearned income.</p>
<p>I don’t know. I don’t use tax software. In the past I’ve found it to be unreliable. Maybe that’s the same problem you’re experiencing now with TaxACT.</p>
<p>I use TaxAct too but I always double check everything before filing. I’ve never had an issue with TaxAct in the past. This year I had 2 issues which I reported to them and they have been fixed in the downloadable TaxAct update 1.01. I’ve replied back to the emails I’ve received about the 2 issues(they are from higher level support) asking about form 8615. I think TaxAct should have triggered more questions about form 8615 based on my son’s taxable scholarships amount. I’ll post if I get anything back from them.</p>
<p>I received a reply from TaxAct support. Their next federal update will address the issue with the change in the definition of unearned income on form 8615.</p>
<p>I’d be interested to know whether anyone else reading this thread and using tax software and having a child with more than $2k of taxable scholarships/grants is seeing form 8615 triggered. Name of software and yes or no would be helpful.</p>
<p>I used Turbotax-free version and it did NOT trigger form 8615 with over 16K of taxable scholarship $$. Does this change anything about the tax implications or is it just shuffling the numbers around with the same results? There are still clear instructions in pub 970 about entering those values on line 1 with SCH in front.</p>
<p>As I understand it the amount of scholarship and investment income the student has that is over $2000 will be taxed at the parent rate. So if the student is in the 10% bracket and the parent is in the 15%, 25% brackets etc., more tax will need to be paid than in the past by the student. Yes, you still enter on line 1 with SCH.</p>
<p>The purpose of the form is that parents could hide assets in their children’s names and pay less tax on investment earnings at the child’s rate. I don’t know what taxable scholarships and grants have to do with that.</p>
<p>So far it isn’t available for applying to the downloadable version.</p>
<p>Posts from others using other software would still be informative as to whether their software is generating the 8615. Name of software, downloadable vs. online, yes or no.</p>