Kid is doing taxes and has taxable scholarship income, 2nd year, 19, dependent. Her taxable income is around $4,500 from work and $15,500 from taxable grants (used for room and board) so after taxing the standard deduction $12K, she has to pay kiddie tax on ~$8K?
She did the standard deduction worksheet and it said she could take it BUT form 8615 says otherwise.
**Question: Does she only get to take the following for her deduction described in 8615 that says this:
“The allowable standard deduction for 2018 is the greater of: (1) $1,050 or (2) earned income + $350, not to exceed $12,000.”
So does that mean #2) 4500 her earned income +350=$4850 is her deduction and has to pay tax on $15,150? If so, is that what she fills in on line 8 of the 1040 now where it asks for her standard deduction?
Any ideas what her tax should really be?
Each time she fills in the kiddie tax form for various online software programs, it also now generates an Alternative Tax Form, should that be happening?
Taxable income is $15,500 plus $4500=$20k. She gets the $12k standard deduction so she is paying taxes on $8000. Some of that $8k is on the ordinary income and some as kiddie tax. The first $2100 of the kiddie tax is paid at the earned income rate, and then at the estate rates.
It says her tax is over $2K! It also is kicking out a bunch of bizarre forms we never had in 6 years of paying kiddie tax for our kids. It generated form 8615 as expected PLUS a Schedule 2, plus form 6251 Alternative Minimum Tax, can that be right?
I found this. It gives an example of earned and unearned income for a 17 year old. However, by definition the scholarship money is considered EARNED income for the purpose of calculating the standard deduction, so your daughter should take the $12k. This example also states that the standard deduction is applied to earned income first. I don’t know if that is correct, but assuming it is, she’d have $8k of income on the kiddie rates. The first $2100 is at 10% ($210), then the next $2550 is also at 10% ($255) and the final $3350 at 24% ($804) Total tax is $1269.
Thank you, it’s still not coming out right though, we were using OLT program, switched to Turbo Tax and it’s saying she owes >$1700 but at least we don’t have all those extra obscure forms.
I really appreciate your trying to help me. It’s so late now here that I will try again in the morning, thanks again!
Are you sure she had $15,000 in scholarahips that paid for nonqualified expenses in 2018?
That seems a lot.
Yes, the amount over $12,000 would be taxed a trust rates.
If her scholarship covered nonqualified expenses other than room and board, (like travel or personal expenses), did she get a refund from the college, did she save any of that money?
We paid the tax for my D when kiddie tax kicked in, because her scholarship saved us money.
Sounds like your D has a full ride, can you help her pay the tax?
I would recommend that you check the tuition statement and 1098T with her to make sure she received that amount in 2018, and figure in books as a qualified expense, if applicable, to try and reduce the taxable part of scholarship.
She can use TurboTax Freedom edition for free with that income, I would recommend working with tax software to make sure forms and calculations are correct.
Use the free file program of TurboTax, make sure you start from the Tax Freedom website, it asks questions about your eligibility to use it (AGI under $34,000 etc) first.
If she started a different TurboTax version, she should delete it and start over.
Also play around with numbers and see if she might be eligible for a retirement savings contribution credit if she contrbutes to an IRA before April 15.
A traditional IRA contribution might reduce her AGI and give her a credit.
Or she can contribute to a Roth IRA.
She had work income.
Might be worth looking into. The money you would spend on taxes could be invested for her instead in an IRA.
mommdc is correct, the retirement savings tax credit cannot be used by a student or by someone who is claimed as a dependent on someone else’s tax return. But contributions to a traditional IRA will allow for an “above-the-line” deduction that will decrease the amount taxed. IRA contributions for tax year 2018 can be made up until April 15, 2019.
Wow, thank you all so much! I tossed and turned all night but it was nice to wake up and see such helpful comments.
@mommdc, that is a super tip for using the free program! Are you sure it supports the kiddie tax form? When we tried a bunch of free programs, we got the “form not supported” message and kept having to start over until we finally tried the olt and then turbotax. We will try the free version today and delete the one she started that was going to be $120 for 2 states and fed!
Yes, we are sure about the taxable scholarship amount, she goes to an expensive and generous school so having a tax bill is better than not being able to go to college. She did have taxes taken out for her summer job so that is offsetting what she owes but it still is coming in at almost $2K total taxes owed just for the fed and the states are super high, too, especially NY!
We can help her pay the taxes but at this point, probably no IRA contributions possible. It would just reduce her financial aid next year and neither of us has any extra money but I will look at the figures to see if it saves enough to make it worth doing. No doubt it would be better to have the money go to an IRA than taxes so thank you for the tip.
Ugh, this is terrible to tax financial aid so much! Thank you again for all of your help!
A student contribution to an IRA should in no way reduce future financial aid. In fact, an IRA contribution could possibly result in an increase in future financial aid.
The difference between OLT and TurboTax is likely whether you’ve told the software that her earned income was more than half of her support.
In general, if you’re getting different results from different reputable software programs, it’s due to different input, not to one program being “better” in some way. Assuming you’ve done the input right, you should get the same answer regardless of what program you’re using.
@BelknapPoint, that’s interesting and I will look into it more. I thought they would add her IRA contribution back in as taxable income when doing her fafsa like they did when H had it taken out of his paycheck. That was added back in as income and reduced our finaid! Thanks for the heads up.
Thanks, @allyphoe. I’m pretty sure we would not have said her earned income was more than 1/2 her support because I know scholarships do not count for that. OLT just created all these other forms along with the 8615 so I will try the free turbotax linked above today. This is my 2nd kid so 6 years of paying tax on scholarships and it has never been this high (or hard) but the new tax changes really hurt, much worse than taxed at parents’ rate as in the past.
My D used TurboTax Freedom edition in the last few years, twice with kiddie tax. Just make sure you always start back.from the Freedom website when signing in
If her earned income was not more than half of her support, then she’s subject to AMT and the 6251 is appropriate. Schedule 2 is related to the new tax law, and generates whenever AMT applies.
The money taken from your husband’s paycheck that was used to fund a retirement account was added back to his income because it was deducted form his pay on a pre-tax basis. That’s not the same situation that your daughter is facing; presumably all of her earned income will be subject to tax.
Whether or not she takes some of the money she earned and contributes to an IRA for tax year 2018, that money will still be reported as taxable income for financial aid purposes, right? In other words, an IRA contribution will not increase her reportable income for financial aid; that income was going to be reported anyway. An IRA contribution will decrease her reportable assets, which could potentially result in an increase in need-based financial aid.
@BelknapPoint, thank you SO much! I just went into the program and put in the max allowed IRA contribution and it really reduced her tax! I am going to see if we can scrape up enough together to do it asap. I realize we have until tax day to set up and fund an account and she is only allowed to contribute as much as her earned income amount. It really does change things in a significant way and yes, of course, you are right, her income was going to be reported anyway, different from H’s situation.
She doesn’t have any reportable assets right now for fafsa.*** Will an IRA become an asset for her to report in the future? I know Fafsa doesn’t count parents retirement accounts but will they look at a students through the Profile and ding her? Thank you!
Now to set the taxes aside and figure out where and how to open an IRA! Any tips on that?
@allyphoe, TurboTax is populating the kiddie tax form correctly, there is no additional AMT.
@mommdc Thank you again, appreciate all of your help and good to know the free form will support the kiddie tax calculations!