Taxable Scholarships for 2018/estimated tax payments questions

Paying for College
1

Now that we know the $12000 Standard Deduction won’t apply to our dependent student for 2018 AND they lose the personal exemption of $4050 AND they will be taxed at the trust rates, can someone double check my figures for the estimated tax payments to be made though 2018 below?

Also, is it possible to make the first payment and then adjust it on the second and subsequent payments? We have to get the estimate within $1K to not have any penalty when we file taxes next year, right? We don’t know what our financial aid package will look like until mid summer and we’ve had some changes in our financial circumstances so we know fall semester grants won’t be the same as this current spring semester.

For example, if my child has $14K in taxable scholarship income after subtracting the $2100 on the 8615 form, I think she would owe $3011.50 Plus $555=$3566.50, does that look right using the new table below? Rounding up, she needs to pay $892 by April 15th?
Trust tax tables for 2018

If taxable income is: The tax is:
Not over $2,550 10% of taxable income
Over $2,550 but not over $9,150 $255 plus 24% of the excess over $2,550
Over $9,150 but not over $12,500 $1,839 plus 35% of the excess over $9,150
Over $12,500 $3,011.50 plus 37% of the excess over $12,500

If I understand these new tax changes correctly, it will no longer be beneficial to claim an additional $4K of scholarships as taxable income to the student so the parents can take the AOC. If I did that, she would owe on $18K, $3011.50 Plus $2035=$5046.50 or an additional tax of $1480. Is this right? WOW, we have always counted on that AOC to pay the child’s federal and two state taxes so this is a big hit in more ways than one but that $1480 additional tax plus the extra state taxes for two states make it not worth shifting extra scholarship income, correct? (I wish there was a spreadsheet for this!)

I am still in shock but now we know we have to do those quarterly payments! I just want to get it done correctly so thank you in advance for your help as I am still recovering from just finishing 3 returns for each kid, plus our 2 so 8 returns total, whew!

2

After we had the discussion a week or so ago (when someone posted the new withholding tables), I looked at the wording and I’m not sure they won’t get the $12k standard deduction.

Currently, the instructions say that a dependent on someone else’s return can take the greater of:

  1. $1050 or
  2. $350+ the amount of earned income (and for this purpose, scholarships count as earned income) but not more than the standard deduction of $6360.

Well, to me that’s where the $12k should be considered the new standard deduction and bump that second option up to $12k. I think the IRS table just didn’t bump it up on the withholding chart.

There is not a penalty for under withholding if you correctly withheld the year before.

3

since you won’t actually get the scholarships until August or September I think there’s a form you can use to so you won’t be penalized for not estimating. DD got hit by this freshman year but the penalty was small enough dh opted to pay the fee instead of doing the additional paperwork.

4

Thank you for your replies. My D will be a sophomore next year so we actually just filed her tax return for her first fall semester 2017. For a first tax return, they don’t penalize you but going forward, we have to make the quarterly payments to avoid the penalty. We know what her taxable grant is for this spring semester, don’t know what next fall will look like. I have been advised to err on the side of caution so I will just have to make the larger of the estimated payments as she will be able to get a refund for the difference and we will avoid any penalties.

As much as I was holding my breath and hoping that a dependent child would get the $12K standard deduction, Forbes and others have reported that it is unchanged. If you do the new tax calculator on the IRS site, it does automatically put in the $12K for a dependent child but I was told that it’s an error.

“In addition, for someone who could have been claimed as a dependent of another, the New Law retains the standard deduction of $1,050 (or the dependent’s earned income plus $350, if greater).”
It’s here in their newsletter, page 4-
http://retirementestateplan.com/wp-content/uploads/2017/10/tax_2018.pdf
Someone also sent me this rough link to the IRS but it’s very difficult to read, pg 8
https://www.irs.gov/pub/irs-drop/rp-17-58.pdf#page=14

@twoinanddone I wish this were true, you said: “$350+ the amount of earned income (and for this purpose, scholarships count as earned income)” No, scholarships don’t count as earned income or no one would be paying the kiddie tax on financial aid grants or scholarships. If that were true, no form 8615 would be needed, and it would all be so easy!

Thank you again! If anyone has evidence to dispute the fact that the deduction amount has changed from the $1050, please post it here, it would be a miracle.

5

A lot to unpack in your posts here about your daughter’s tax situation, but I will start here.

twoinandone is correct. For determining standard deductions, scholarships are considered earned income. But, scholarships are considered unearned income when figuring the kiddie tax. Isn’t the IRS great? Just like there are multiple IRS definitions for the term “qualified education expenses,” depending on what tax feature you are talking about.

Based on what you have posted in this thread, this is not your only misunderstanding about reporting income and paying federal taxes. I recommend that you either use a reputable tax preparation program, or find a good tax preparer.

6

The two links you provide were both written/published before the tax law changed, and their purpose is to make note of the federal brackets, rates, etc. for tax year 2018 under the old law.

This revenue procedure sets forth inflation-adjusted items for 2018 for various provisions of the Internal Revenue Code of 1986 (Code) as amended as of October 19, 2017. To the extent amendments to the Code are enacted for 2018 after October 19, 2017, taxpayers should consult additional guidance to determine whether these adjustments remain applicable for 2018.

https://www.irs.gov/pub/irs-drop/rp-17-58.pdf#page=14

*These are the numbers for the tax year 2018 beginning January 1, 2018 b*. They are not the numbers and tables that you’ll use to prepare your 2017 tax returns in 2018 (if you need those figures, please see page 8 of this report). You’ll use these numbers to prepare your 2018 tax returns in 2019. If you aren’t expecting any significant changes in 2018, you can use the updated tax tables and other tax numbers to estimate your liability.

http://retirementestateplan.com/wp-content/uploads/2017/10/tax_2018.pdf

Edited to add: if, as you report, the new tax calculator on the IRS website shows a standard deduction of $12,000 for a single taxpayer who is claimed as a dependent on someone else’s return, that should tell you something.

7

Yes.

No. There are several different “safe harbor” provisions that will keep you from paying a penalty and interest.

8

Yes, the personal exemption has gone away for 2018. Are you aware that there is now a $500 credit for tax dependents who are not “qualifying children” (meaning a child who is not eligible for the child tax credit)? Using the 2018 brackets and rates, a married couple filing jointly with an AGI of $100k would save $486 if they could claim an exemption of $4,050 for a child. Taking a tax credit of $500 for that same child instead is a better deal.

9

Thank you @BelknapPoint . There is hope then when you say “Edited to add: if, as you report, the new tax calculator on the IRS website shows a standard deduction of $12,000 for a single taxpayer who is claimed as a dependent on someone else’s return, that should tell you something.”

I am really confused now about the earned vs. unearned income. For D’s tax return that I just completed, I guess I made a mistake because we paid kiddie tax on her scholarship income. We entered her scholarship income that covered room and board on line 1 of the form 8615 and then just followed the instructions from there, subtracting the $2100 and just going step by step. Both kids were shocked to find that they had to add in their siblings scholarship income as well as the parents just to determine what they owed. I wish we could afford an accountant! Doing 8 tax returns and apparently all wrong was no fun. We did use tax software for all of them, turbotax and taxact both but they were free file programs so maybe they were no good. It automatically generated the forms 8615 for both kids and calculated the AOC credit for us. Yes, I saw there is a $500 credit for 2018.

How and when will we know for sure if she is allowed the $12K standard deduction? If you were me, would you make the estimated quarterly payments?

If the tax calculator is right, it is a real blessing and she would end up paying much less than we imagined and then we would do the shifting of the additional scholarship to get the AOC.

Thank you SO much!

10

As I said above, you are supposed to factor scholarship income into the kiddie tax.

Through tax year 2017, the unearned income of siblings is only used when computing the kiddie tax so that the extra tax to pay, based on the parent’s highest marginal rate, can be properly allocated between siblings. That’s what the percentage on line 12b of form 8615 is used for. There is no extra tax to pay if a sibling also has unearned income. Starting this tax year (2018), sibling unearned income will no longer be a factor when calculating the kiddie tax.

I think twoinanddone has it right in post #1, this thread.

I have no idea. The new tax law, done with great haste and implemented less than a month before it went into effect, makes it very difficult to do proper tax planning. Do what you think is right, keep an eye on things (your family’s finances and interpretation of the new law) as the year progresses, and make adjustments as necessary.

11

Even with the scholarship counted as earned income for the purpose of determining the amount of the standard deduction ONLY, my daughter still had to pay taxes on her scholarship. I think 2 years ago she had about $10000 in unqualified scholarship amounts, and $0 in earned income, so the $10000 was added to income and appeared as (sch) on the top line. She then got the $6350 as a standard deduction and paid tax on the rest under the unearned income calculations. This year it is about the same but she had $3000 in earned income so will pay a little more in taxes, some as earned income, some as unearned. The income line on her tax form will read

“…(sch $10k)…income $13000”

12

Thank you both again!

Yes, @twoinanddone, thank you so much. That is how the tax software did it for D, put (sch $) to the left of the total income as she also had a small amount of income from work. I think we did it right but wouldn’t it be nice if the IRS said, “Oh, you paid too much, here is the correction and the refund.”

I am going to remain optimistic and hope that it is true that the $12K will be her standard deduction, that would be great. If it’s in the calculator already, it must be true! There is even a place to enter scholarship/grant income on that calculator form and we get some reasonable tax amounts so I am more convinced than ever it must be right.

I am so glad that I posted and asked here, I was losing sleep worrying about this so thank you all once again!
Special thank you @BelknapPoint for spending so much time helping me. I really appreciate it.

13

I really encourage people to get a tax software. I have been using TurboTax and HR Block for many years but I found them particularly useful for situations like this. I have been playing around with the taxable scholarship amount and kiddie tax calculation trying to max out our total tax return in the family. Just the difference in amount can pay off the cost of software plus extra saving.