Financial aid for room and board and other expenses is being taxed as if it is unearned income.
I wonder if this is why my daughter, an MD/PhD student, had to pay so much in taxes this year. Ugh.
Moving to the FA forum
Taxing the non QEE as unearned income isn’t new; it’s been that way since 2013 (?) when the income was reclassified as unearned and taxed at the ‘kiddie tax’ rate. Before that it was taxed but I think it was under the student’s regular rate. (I didn’t have a kid in school at that time but I think that’s how it was).
What is new is that the kiddie tax rate went from the parents’ rate to the estates and trusts rates.
Not a new change, and for the purpose of determining the appropriate amount of the standard deduction, it is considered earned income.
@shyparentalunit - The part of a PhD stipend that is “salary” and expected to go for living expenses is taxable. If your kid hasn’t changed state of residence, that can make a difference at least in the state income taxes. I know one not-smart-about-regular-life brand new PhD who retained residence in her home state all through her grad program despite having moved to a no-state-income-tax state for her PhD program. 
The change is that it is being taxed like estates and trusts, which is a big hit. Before, it was taxed at the parents rate for UG students up to age 24. For low income families, this can be substantial for kids with a big scholarship.
It might be a big hit, depending on a variety of circumstances. For some students, having the kiddie tax based on estates and trusts brackets and rates instead of the parent’s highest marginal rate may be a good thing.
Also the standard deduction covers a lot more.
My D faced kiddie tax in previous years, but not this year, despite earning more work income, because the maximum standard deduction is now almost double what it used to be for dependent students (and single taxpayers).
How much does your daughter get for stipend? How much more than the standard deduction? Aren’t stipends like $15k-30k per year?
And don’t the amounts for expenses like books, fees, and mandatory supplies get excluded?
@BelknapPoint and @twoinanddone would the expenses for mandatory exams be excluded? (Like mandatory Step 1)?
I don’t know about the mandatory exams while IN the program. The ones to apply to a program, like an LSAT or GRE are not QEE. The bar exam and study materials are not deductible as an education expense but may be as a work expense. Probably not many taking those are itemizing deductions anymore.
But if the parents marginal rate is high, would the student be getting a lot of financial aid? For kids that are getting aid for room and board, seeing a lot of that money going to taxes could be quite a hit.
Not all financial aid is need based, so a student could be from a high income family and still get taxed on a lot of aid.