<p>MiddKidd, I don’t agree that it is like groceries that aren’t taxable. Even if you bought $10,000 in groceries, it’s still not taxable. Even if you bought a million, it’s not. In the case of income, it’s all taxable from $1 up. No requirement to file a return at certain income levels, but it’s still income. There are exemptions, there are credits against the taxes owed, but the amount is all taxable. I think it is a mistake to think of it as non-taxable because then when the student does earn more income, he or she may not understand why there is no exemption. There is only one personal exemption on the whole pile of income.</p>
<p>There is another thread started today where the parent is being audited for the AOTC and now must show that the kids claimed some of the scholarship money as taxable. It might be a smart idea for the student to file a tax return anyway, even if there is no tax to be paid, because it might be needed as proof to the IRS. I filed one year when I didn’t earn anything just so I’d have a copy of a return to provide if anyone asked for it. It is so much easier to just provide a filed copy than to explain why there was nothing filed.</p>
<p>You said that all income is taxable. But earnings on a Roth IRA or a 529 account are not taxable income, if used in an appropriate manner, no matter the amount.</p>
<p>Are the earnings on an IRA considered ‘income’ or ‘interest’? I don’t know, but think it is interest and entered on the 1040 line for interest, not income. I haven’t had to report IRA or 529 earnings.</p>
<p>The OP asked about scholarships that were being used for R&B, and that is income by definition.</p>
I don’t think the IRA distribution is interest. You report the distribution of (before-tax) IRA on line 15a & 15b of 1040; and you would report the interest on line 8a & 8b.</p>
<p>Also you report the taxable 529 earnings on line 21 of 1040.</p>
<p>For the 529 I thought you paid tax on your earning before you put it in the 529 and don’t pay tax when you take it out for college expenses (including R&B) but if you take money out for anything else you have to pay tax on the interest earned but not the principle because you already paid tax on that when you originally earned it. Do I have this right?</p>
<p>Yes, but you can’t use the amount paid with the 529 money for the tax credit. You said tuition and fees would all be paid, plus half of R&B, and that you would then pay the rest with 529 money. If so, and R&B is $10,000, $5000 would be taxable to the student and $5000 would be 529 money, and you are done. Student reports $5000 as taxable scholarship award.</p>
<p>You’re mixing up your terms. Interest is a type of unearned income. For instance, the earnings from a savings account or CD are both income and interest. IRA gains are usually not interest, unless the funds are in some type of interest bearing investment. Typically, IRA funds are invested in stocks or bonds.</p>
<p>Are you talking about the college tax credit? There’s no way we would be eligible for the college tax credit since everything other than R&B would be covered. If we pay our D (and younger S’s) for working for our business we can claim what we pay them against our business expenses. I think that since the kids earned income is taxed at a much lower rate we would come out ahead this way and they’d likely not earn enough to be taxed anyway (though we would still have them file a return for the paper trail.<great advice="" up="" thread=""></great></p>
<p>Here’s what what I am thinking and this is all hypothetical at this point and not sure if it could work this way:
Starting this year January of high school junior year through senior year December her senior year of high school, D starts working part time for our business total projected income about $3-5K depending how much she works, we can claim what we pay her as a business expense. She deposits this into her 529 because it has a better return than sitting in her checking account and can withdraw it for educational purposes <em>including</em> room and board with out paying taxes on the interest.</p>
<p>Freshmen year School scholarship covers tuition books and fees and 1/2 R&B ($5K), private scholarships ($5K) ideally I’d like rolled over the private scholarships until sophomore year, pay the remaining $5K for R&B paid out of 529 so taxable scholarship money is only 5K which means no tax is owed and she get to take a year off from working for our business that year. I will be asking about how the school would handle this when we visit in February because I think it’s something easier discussed in person.</p>
<p>Sophomore year: School scholarship covers tuition books fees, uses last year $5K scholarship to pay 1/2 R&B and $5K out of the 529 for the remainder. January Sophomore year she returns to work for our business putting her earnings into the 529.</p>
<p>Junior year she continues to work for us and contributes about $5k a year to her 529 and uses $10K to pay for her R&B
Senior year same as Junior year.</p>
<p>She would use what’s left for grad school or move her 529 to one of her younger brother’s 529 accounts.</p>
<p>Do you think this plan would work?
Just to recap, she’ll be starting with about 20K in her 529, there is no need based financial aid involved, we will not be using any college tuition tax credit and D would be totally fine with putting her earned income into her 529 account and later moving what ever is left to her brothers and we would be careful to keep her earned income low enough to avoid paying taxes. I’m thinking that this all hinges on if the college will hold on to and roll over the possible $5K in private scholarships from freshman to sophomore year, they do mention that they do roll over other parts of the college based scholarship from year to year and even to grad school so I do think this is possible.</p>
<p>I don’t think schools allow you to roll over scholarship money from year to year - they usually just pay any excess out to you. If it is a private scholarship, you might be able to not have that paid to you until you need it. We had one private scholarship that we could apply for any time in the student’s lifetime, but it is just paid (all at once) once.</p>
<p>Remember that a tax year is not the same as a tuition year. If she works spring of senior year in high school, any money she earns will be in the same tax year as the fall freshman semester for school (but she’ll only have 1/2 the room and board too). </p>
<p>It does become a numbers game. Also, I just used $10k as an example. One daughter’s r&b is close to $14k, the other is about $11k, but the standard deduction for taxes is $6200 (this year). Moving “half” plus earnings from work during the year might get you above $6200.</p>
<p>For a number of reasons, it usually is better to file a tax return even when not required due to income being below the threshhold. It makes all sorts of verification a lot easier, when selected for the such. Many places will just look at the tax return and no further questions whereas it gets dicey and you may need to come up with multiple items and sign affadavits when you don’t have that return. We were verified just for PLUS and one of the items requested was my son’s tax return for a year when he was well under the req to file a return. If he did not have one, then he had to come up with other info that was not as easy to do. </p>
<p>Though ALL income is not taxable, there are cases that even tax exempt income becomes taxable, if taken out at the wrong time or circumstances. It’s wise to check what the rules are for any transaction that has any possibility of being taxed. </p>
<p>Yes, it can get complicated with a lot of things going on. One often has to test how things work out the best. Is it better to pay tax on 529 funds or leave the money in there? By playing around with different scenarios, one can get the optimal combo for an individual situation. Not a lot of one size fits all advice to give that is specific because it can so depend on the situation.</p>
<p>@twoinanddone I was also rounding R&B for next year it’s listed for this year at $9,126 and I’m sure it will increase and the freshman year scholarship for R&B is $4220, of course this could change too. You are right that I’ll need to be mindful of dates and the tax year, that’s another reason to have this figured out soon.</p>
<p>I think I <em>might</em> be able to wait and use the private scholarship during sophomore year because on the current school scholarship package it states in a few places “Can be used toward any graduate/professional program at OU if funds remain after completion of undergraduate degree (including medical school and law school)” I think this is something I will need to talk to the school about. </p>
<p>These are links below to several other threads about this situation. </p>
<p>DD1 has a full ride scholarship and the portion of it which exceeded tuition, fees and other QEE such as books became subject to kiddie tax starting in the 2013 tax year, being reported in the same way as investment income - it is now just all considered “unearned” income - I think that the first 2K is exempt from fed taxes, but not 100% of that amount. The language in the unearned income definition was revised last year, unfortunately. Last year, both HR Block and TaxAct software included the change.</p>
<p>It definitely seems like an incredibly unfair situation for the student, but the IRS is not known for its fairness regarding taxes, LOL, So nice to penalize students for winning scholarships!</p>
<p>At any rate, our daughter’s tax bill doubled over what it was for the 2012 tax year. On the other hand, writing a bigger check to the IRS is still less painful than paying a large college tuition/room and board bill instead. This is what I tell myself and my daughter to ease the frustration with this situation!</p>
<p>As far as state taxes go, my daughter was required to file taxes in the state where she attends school, but that may not be the case in every state. You will need to research state rules for your own situation.</p>
<p>Also, the school will send out 1098T form reporting the total scholarship amounts and it is up to the filer to calculate the actual amounts to list on the tax return. For example, our daughters 1098T for 2012 included 2 semesters worth of scholarship payments, but only 1 semesters worth was actually applied in 2012, so we had to calculate the right amount to report for that first semester, also deducting the cost of books and fees. Then for the 2013 return, we had to use the remainder of the 2012 1098T amount(paid toward spring 2013) + the fall 2013 payment.</p>
<p>The child’s unearned income (the kiddie tax definition, so includes taxable scholarships) is taxed at the child’s tax rate for amounts up to $2,000. Unearned income over that amount is taxed at the parents’ highest marginal rate. This all assumes that the child is subject to the kiddie tax in the first place.</p>
<p>Thanks for the correction @MiddKidd86 - I just got back home after spending all day traveling home from a trip and missed the boat on all of the details - too tired to pore over my tax returns!</p>
If I only withdrew from my 529 to my daughter’s account less than room/board, making them qualified withdrawals, does she need to file taxes at all? (Assuming no other earnings).
I’m not sure I understand your question. Are you saying that your daughter had no income in 2014, earned or unearned? No taxable scholarships? What kind of account does your daughter have that the 529 withdrawals were put in? How long was the 529 money in this account and what happened to it next?
The situation is more complex, but for the purposes of keeping the questions simpler, lets assume:
1 - no other earned or unearned income.
2 - no scholarships.
3 - 529 with myself as owner, daughter as beneficiary
4 - Money has been in there more than 10 years and grown.
5 - Withdrawal in 2014 directly to daughters account. (part of it considered basis, other part considered earnings) -> Breakdown reported to IRS in 1098-Q by 529 Plan, 1098-Q also provided to daughter.
6 - amount used to pay room and board, therefore qualified withdrawal.