Taxable scholarship question

The balance in any retirement accounts are not counted as assets on the financial aid forms…for parents or students.

None of the free editions are likely to handle 2 state income tax filings without charging you for the second state. We’re hitting that issue this year.

A non-education IRA held by a student is not a reportable asset on FAFSA. As far as I know it will need to be reported on Profile, but it’s not likely that a school using Profile will count student-owned qualified retirement assets against the student.

Thank you @thumper1. I looked at the last few years of profile forms and it does ask the question under student assets, “Enter the total value of non-education retirement accounts as of today. Include all non-education IRA, Keogh, SEP, 401(a), 401(k), 403(b), 408, 457, 501© accounts.”

This seems to indicate that colleges will add it in as an asset and then she would get hit 20% so almost equal to the tax amount she’d save now by setting up the account and making the contribution. She then asked about contributing to her 529 but there is no tax credit for that. Rock and hard place?

I’ve dealt with this before. My student had earned income from two different states (home state and the state where the college was located), and needed to file a federal return plus a return for each state (a resident return for the home state and a non-resident return for the state where the school was located). I wanted to e-file all three returns with no cost. Fortunately, the home state has its own free online filing. Unfortunately, you can’t use the state’s online filing service if you want to claim a credit for tax paid to another jurisdiction. So, the only option here was doing a paper return. I used a free option to complete and e-file the federal return and the non-resident return for the state where the school was located.

If your student isn’t forced into filing a paper return for a reason like the one noted above, there may be work-arounds to do free preparation and e-filing of a federal return and two state returns. First, see if one of the states has a free e-file option from its own website that meets all your needs. Then e-file the federal and other state’s return from a free program. Or, use two different free programs, one to prepare and e-file the federal return and one of the state returns, and the other to prepare both the federal and second state return, but only actually e-file the second state return.

No…there is absolutely no evidence that colleges use the amounts in retirement accounts to compute need based aid. Yes, the question is asked on the Profile for both parents and students…and it was also asked about your parent retirement accounts in the past , right? Do you think those amounts had any impact on the awarding of need based aid for your student? No.

Speculation is that this question is asked on the Profile to see if there is some significant difference between income and what a person has in retirement savings. For example, if someone has $1,000,000 in retirement savings as a student, with practically no income…it would beg the question…how?

ETA…some schools have optional questions on the Profile about values of the cars you drive…all of you. There is also no evidence that this is used to calculate need based aid.

Likewise, there is a question on the Profile asking how much you can pay for college costs. That isn’t used either.

Just because they ask on the Profile doesn’t mean they use the info in the calculations.

Genuine question: which IRS definition of “earned income” applies here? OP’s daughter’s situation involves wages and taxable scholarships. Taxable scholarships are reported on the same 1040 line as wages, salaries, tips, etc. Certain children under age 24 who don’t have earned income that is more than half of their support have an AMT exemption that is equal to their “earned income” plus a specific amount ($7,600 for tax year 2018). In years past, IRS instructions stated that the specific amount to determine the AMT exemption was added to the wages, salaries, tips line on the 1040, which also could have included taxable scholarships. If that’s still the case for tax year 2018, OP’s daughter’s taxable scholarships should get lumped in with real earned income before the $7,600 is added to determine the AMT exemption amount. Or am I missing something here?

You can try it, if it doesn’t work, you can file the second state through the state’s website possibly.

It did her federal and state return this year and all previous years for free. It asked about another state I believe.

This is a different version than the basic or free one that wants you to upgrade if your return isn’t simple.

The Freedom edition has you answer questions up front and you qualify for free filing (supposedly all forms) by meeting income or other requirements (active military, or qualifying for EIC).

I found something apparently authoritative, although I will be the first to say I have not tracked all the citations down myself. “Proposed Regulations section 1.117-6(h) allows students to consider taxable scholarships as earned income for only two purposes: when determining the standard deduction for a dependent and when determining whether a dependent must file a tax return.” See also discussion here: https://www.cpajournal.com/2016/09/08/paying-childrens-education-can-taxing/

I deleted the Paid Turbo Tax account and restarted from scratch on the free edition linked here in this thread and now it won’t populate the kiddie tax form. Any ideas?

It did enter her scholarship income to the left of line 1 on the 1040 but doesn’t compute the additional tax. Is it possible that she doesn’t owe that and she isn’t required to pay kiddie tax? Nah, we know she does so why won’t the free form do it! Right now it’s saying her total tax is $800ish, wouldn’t that be nice? We did enter parents info and the 1098T info which is where it picked up the taxable scholarship income amount correctly, hmm. Now I have spent all day on this again and not getting anywhere, so frustrating.

https://ttlc.intuit.com/questions/4312622-i-do-not-see-form-8615-on-turbo-tax-i-need-it-to-file-my-sons-u-earned-income-all-i-see-is-1099-music-how-can-i-find-it-on-turbo-tax

Why did you enter parents info? Also, the information on 1098-T forms is notoriously inaccurate. If you are using the actual numbers from the 1098-T, you need to make sure that they are correct.

Please note that the link provided in post #30 takes you to a question and answer that is based on filing a 2017 tax return with form 8615 (the “kiddie tax”). This information is no longer completely accurate, as the kiddie tax rates are no longer tied to the parent’s highest marginal rate. Kiddie tax rates, effective for tax year 2018, are based on the estates and trusts brackets and rates.

@BelknapPoint you sure know your stuff! In our case, one state does not have free file software and the other state’s can’t be used for a part year resident. So, one is going to have to be paper (probably whichever looks like it’ll be less complicated). Last year of dealing with taxable scholarships and student income in general. Hallelujah.

Sorry for the trouble you are having. Can you preview the return before filing?

For my D it generated the 8615 form but her unearned income was smaller and she didn’t owe any tax.

Link was provided to help her get to the 8615.

Understood; I was simply pointing out that some of the additional information provided was out of date and should not be relied on.

Thank you all so much! We were able to plow through all 5 returns after a hard look at setting up an IRA. D’s reaction to that was as expected, no way did she want to tie up what little money she had plus whatever we had set aside to pay her taxes so we dropped that idea. But, if anyone ever comes here and reads this, it WAS the right thing to do! Belknap was spot on with her advice. Even if they did look at the asset, D is at a 568 “consensus methodology” school that would only assess any student asset at 5% so in the long run, we would have saved quite a bit more than any bump in our efc and I am quite sure that Belknap was right and it wouldn’t have been counted at all. Wish we could have done it…

In the end, we couldn’t get the free program linked above to work and had to go to another program. We were able to do the fed and one state for free. The other state costs ran anywhere from $20 and $30+ and some programs wouldn’t let us file state without a fed so we did the fillable form and will mail it in. I will note that one of the states required us to efile and we also had to do that one first to get credit for state #2’s taxes paid in another state so there wasn’t a lot of debate over which one to efile. In the end, it all worked out but ugh, it was a chore and painful to pay so much tax on D’s financial aid grants.

Thanks again to everyone who pitched in with ideas and tips! Only 2 more years of this and then I will be free, yay! Maybe next year, we will do the IRA for D knowing how much it would have saved. D will be closer to employment and I have a whole year to impress upon her the importance of saving for retirement.

I’m glad you got it all worked out.

Sorry that the Freedom program didn’t work for you. With the tax changes in 2018, maybe not everything was programmed correctly. Not sure.

I don’t know if you could give them feedback to let them know about the issues you had.

It seemed to work as always for us, but like I said, my D’s total taxable income was below the standard deduction.

@twoinanddone Trying to extrapolate off your post earlier on this thread.

Direct question is: Is there NO Kiddie Tax, and no messing with extra forms, calculating 24% in excess of…etc etc etc, if the dependent college student’s total income is less than $12,000?

I will make up a numerical example to ask my question, using the case of a dependent adult child who is a fulltime college student under the age of 21:

If “taxable” scholarship = $5,000 and earned income = $4500 :

My understanding is that the “taxable” scholarship counts as earned income when calculating the dependent’s standard deduction on Worksheet 1, so taxable income =0. Is that correct?

Is form 8615 relevant? It says “Tax for Certain Children…” ! If it is relevant, looking at this form: it looks there is no taxable unearned income since the taxable scholarship is less than the deduction calculated above. Is that correct? Does that mean there is no “kiddie tax?”

[Possibly silly side question: For form 8615, line 1, where it says “enter YOUR unearned income” - this is the DEPENDENT’S unearned income, right?]

No kiddie tax, no regular tax, and no federal filing requirement for a kid whose only income is W-2 wages plus taxable scholarship totaling $12k or less.

If the Form 8615 says “you,” it means the taxpayer. The same “you” as enters their SSN at the top. Not the parents of the taxpayer.