Ok, so my D19 will have $17,000 a year in taxable scholarships. I know that sounds high, but that is the amount of room and board and she has a full scholarship. I’ve read some posts on here and I’ve even asked an accountant and I’m still confused. The accountant told me that her tax rate would be about 10% but on here I’ve read it’s 24%? We are gonna have to save slowly to pay for them, so I would really like to know what number she is looking at- we are trying to prevent her from having to take loans if it can be avoided. Also, for next year she won’t owe anything, right? Since 2019 will only include one semester and that’s under the deductible amount? Thank you for helping me understand!
I would suggest you consult a CPA @milgymfam.
I have. That’s what is confusing me- I’m fairly sure she was wrong- she contradicted everything I’ve read on here.
I could be completely wrong, but my understanding is that she will be taxed at the trust rate on $5000 (17000 scholarship less 12000 standard deduction), so if the rate is 24%, her tax would be $1200 if she has no other income. And assuming the 2019 scholarship portion ($8500) plus any other income stays under $12000, then she would not owe anything this year.
Accountants I’ve spoken with are frankly clueless about this stuff. The IRS website documentation can be slow reading but it’s what I’m relying on this year.
I’m NOT an accountant, but I’ve researched this very question. Here’s what I found.
The taxable portion of scholarship funds (the amount in excess of tuition, books, and required fees) is treated as UNEARNED income for the purpose of the tax rate, but as EARNED income for the purpose of calculating the standard deduction.
The standard deduction for an individual who can be claimed as a dependent on another person’s tax return is generally limited to the greater of:
$1,050, or
The individual’s EARNED income for the year plus $350 (maxed at $12,000).
Scroll down to the bottom of table 8 https://www.irs.gov/publications/p501#en_US_2018_publink100022921
to see that taxable scholarship funds are treated as earned income for calculating the standard deduction of a dependent. So if the taxable portion is, say, $10k (and she has no other earned income), she can take a standard deduction of $10,350 and STILL be claimed as a dependent on your tax return.
However, when calculating the taxes due, the portion of her taxable scholarship funds that exceed her standard deduction is treated as UNEARNED income—and is subject to the kiddie tax. Under the new rules, kiddie tax is calculated at the trust & estate tax rate (not YOUR tax rate). The first $2,100 (after standard deduction) is exempt. Beyond that, these are the brackets: https://www.kiplinger.com/article/taxes/T054-C005-S001-big-change-for-kiddie-tax-under-the-new-tax-law.html
Here’s some additional info in taxes on unearned income:
https://www.irs.gov/pub/irs-pdf/i8615.pdf
Good job Brantly!
For the first year, she’ll have the room and board from the fall. if that’s ~$8500, and she has no other income, it would be under the standard deduction so no tax would be owed.
For the second tax year, you could guestimate the taxes that will be due as $17k less the $12k standard deduction or tax on $5000 at the 24% rate. It won’t be that much as the first $2100 is exempt, but you’ll surely have enough saved with overestimating. Also, if she does earn any income over the summer or from working during the school year, make sure to have taxes withheld by the employer as if it is all taxable as she’ll have ‘used’ her standard deduction. The tax withholding tables for 2018 were very minimal and didn’t withhold very much, so my daughter’s refund was very small compared to prior years. If she’d actually not had the standard deduction, she might have owed money.
@twoinanddone So my research was correct? I always wonder if I’m missing something.
@BelknapPoint your thoughts?
Well, I let TurboTax do the work, but I like to know how is it supposed to come out to see if my numbers are close. My child was off the kiddie tax and did her own taxes this year, so don’t really know how the 24% rate panned out, but I see it as you do.
And CPA/Tax experts don’t know as much as the parents who actually PAY, so we research more.
I took my mother to a VITA clinic at a local university. Have to say I wasn’t that impressed with the kids/future CPAs doing the taxes. I overheard one guy who was the ‘reviewer’ telling a woman that they just use the 1098-T. No questions to her about textbooks or other QEE. Maybe they were on her documents, but I don’t think so. I think I could have saved her more money than the experts.
Thanks everyone. I think we will plan on something in the neighborhood of $1,000 a year and hope that’s about it. I appreciate the posts!
If OP’s daughter’s only income will be $17k/academic year in taxable scholarships starting in fall 2019, she will have no tax liability in 2019 because the standard deduction for a single taxpayer ($12,200) will take care of all of the $8.5k 2019 income (assuming the spring 2020 scholarship money isn’t credited to her account by the school until 2020).
Let’s say that the full $17k in taxable scholarships is “earned” (or credited) in 2019. After the $12,200 standard deduction, there will be $4,800 in taxable income, subject to the kiddie tax which uses the estates and trusts rates and brackets. The first $2,600 will be taxed at 10% (so $260 in tax) and the remaining $2,200 will be taxed at 24% (so $528 in tax). The total federal income tax owed would be $788.
But be aware of whether your state conformed to the new $12K standard federal tax deduction and kiddie tax rates. If your state didn’t (like in CA) there may be a lot more state kiddie taxes to pay (at the parents’ marginal rate). In CA that could even exceed the federal kiddie taxes.
@Twoin18 the state would be PA. Do you know if they have. Being military from PA, my husband hasn’t been subject to state taxes in many years- I almost forgot she’s going to have to pay twice!
Looks like a flat tax with no deductions in PA. So ~3% on the whole amount it appears. Is she staying in-state for college? If not then tax would be due in the state where the income arises and in the state of residency (with any non-resident state taxes deducted). In that case it’s worth considering whether the state where the college is located might be more advantageous for residency from a tax perspective (hence my D is no longer a CA resident). Though other complications then arise about your $500 credit for dependents.
We are all residents of PA already.
Thank you for your help!
I think the CPA’s are getting tripped up because the IRS changed its handling of this income around 2015(maybe 2016?). They didn’t change the rules, they only changed the interpretation of the rules. It really did used to be that simple 10% calculation. It is really not a fair way to handle this “income”.
We pay no tax on scholarships in PA.
https://www.pacode.com/secure/data/061/chapter101/s101.6.html
See PA code paragraph 101.6 Compensation
quote Scholarships, grants, awards and other types of student aid which require no past, present or future services in return for receipt of the funds are not taxable.
[/quote]
@mommdc really? Even room and board??
I agree with @BelknapPoint.
Re: trust rates, see below
https://www.irs.gov/pub/irs-pdf/i8615.pdf
$0-$2,550 of her unearned income after standard deduction will be taxed at 10% and the rest at 24%
I’m coming up with $795 in taxes for 2020 on $4,800 net unearned income.
You should not have tax due for state ¶. Unless the school is in another state.
Also if she is dependent on you for taxes and parent qualifies for PA tax forgiveness, child does too.
She might have to list scholarship on PA schedule SP (tax forgiveness). But if she has no taxable PA income she shouldn’t have to file a PA return.
I would recommend maybe a part time summer job for her. Fill out the W4 with single 0 allowances.
Thanks again! She will likely get a job next summer if she doesn’t have an internship. This summer is she au pairing in Italy so won’t have a salary, and then the rest of the summer she has some scholarship commitments. I appreciate the advice!