An article posted on the Higher Ed site says that oops, “Tax-cut law rushed to passage in 2017 included increase in taxes on students with college scholarships. Lawmakers say they plan to introduce fix this week.” It says if passed, it will be retroactive! We were really hit hard with tax on my D’s financial aid as those of you know who helped me weed through the changes so I just thought I would post potential good news.
I didn’t run any actual numbers, but I do wonder if it actually increases the amt beyond what it would have been prior. We didn’t see an increase. It is hard for me to tell if that is an accurate assessment bc dd’s scholarship is less than her brother’s was. But, just thinking it through, it seems like the current system would have resulted in less for him due to the $12,000 individual deductible vs the $6300 threshold determinant/exceed $2000 under the old kiddie tax rule. Except for the yrs he had REU $$ in addition to his institution scholarship $$, his non-QEE scholarships wouldn’t have exceeded $12,000 by much, if any.
Anyone have a student who had the same amt of full-ride scholarship under the old and new tax laws? What were your results? More or less owed?
My D didn’t have a full ride but had more work income last year but due to the higher standard deduction didn’t owe any kiddie tax.
We lost exemptions but with the higher standard deduction, child tax credit doubling and the dependent credit for the older kids, we still broke even I think.
@cptofthehouse But if the excess taxable amts are less due to the greater standard deduction, does the higher tax rate make the taxes due more than the old kiddie tax rate? It may, but without actually going through and doing the math, I wonder. The article stated that it would increase the tax burden by $1500 at a private school. I question their numbers b/c non-QEE don’t really vary so much by public/private. $12-16,000 seems the typical span for room/board costs whether public or private. The student gets to claim the $12,000 standard deduction, so the taxable portion is only beyond that. If the new tax rate is say 37% and the old is 10%, based on the different formulas, what is the actual tax differential on say $17,000?
(IIRC, which I may not b/c it has been over a yr), I think it used to be that the $6300 personal exemption was used to determine whether or not they needed to report, but then if they did (which with a full-ride they would have to), I think anything over $2100 was taxed at the parent’s marginal tax rate.)
What I don’t remember is if they were able to deduct their standard deduction and the $2100 or if it was the amt beyond $2100 if they had to file. We always paid approx 1/3 of his scholarship, so based on my just running numbers through my head, I would say he didn’t get to deduct the $6300, but I may be wrong b/c I might be confusing when he had additional REU $$ amts (which added an additional $5000 in scholarship $$ beyond his full-ride) vs. just when he had room and board scholarship $$.
I’m too lazy to run through the numbers and figure it out.
The tax rates used for the excess were the marginal tax rates of the parents. Where I worked this year, many of these parents paid no taxes. They didn’t make enough money to do do; they got social security disability. So their marginal rates were zero or If they had some income, 10%. That’s a heckuva a lot less the 30-something rate of trusts and estates.
Also kids sometimes work which also uses up some of that $12k standard deduction.
It’s the low income kid that is hit hard with this change as you can see
A tax filer who is claimed as a dependent on someone else’s return (such as most of our students) does not automatically get a standard deduction of $12k. This is how the SD is calculated for dependents:
It CAN be $12k, but it is not automatically $12k, as it is for an individual filer.
The example used in the article was $50,000 income, so they were paying at least 10%. For 0% kiddie tax rate (I didn’t realize there was such a thing) it would make a difference. At 10%, is it $1500 in difference? It is the article’s numbers that I question bc they don’t actually show anything. They just make the statement.
@brantly Scholarship in excess of QEE is considered earned income for the deduction even if it is taxed at the estate tax rate. “The Standard Deduction treats scholarships as ‘earned’ income. In other words, the student will get the $12,000 Standard Deduction, and only the income above that would be subject to Kiddie Tax.”
@cptofthehouse Yes, it is. But the deduction is now much greater, so the amt taxed is less. If the formulas are “old” 10% of —the amt minus $2100 vs “new” 37% of—the amt minus $12,000, is the differential $1500? (If that is the correct way they were calculated, not much difference. I can’t remember if they got to deduct the old $6300 standard deduction. )
It is not apples to apples 10% of the amt and 37%'of the amt.
But if the student needs it to be $12k because of a large taxable grant/scholarship, it will be.
If the student has $3k in regular earned income and $6k in taxable scholarship, yes, the standard deduction will only be $9, 350. If that’s all the income the student has, the tax owed will be $0; $9k in taxable income, standard deduction of $9350, tax figured on -$350, or $0 tax owed. If the student has other unearned income, ( from interest?), then some tax may be owed on that unearned income at the now higher estates and trusts rate if it isn’t covered by that extra $350 on the standard deduction.
That won’t change if the law is repealed or adjusted. Non-scholarship unearned income is still unearned income and taxed as such.
Where this could help is if the student had in excess of $12k in regular income and non-QEE. If the student had $10k in income and $15k in scholarship unearned income, the student would then have $25k in income, less $12k standard deduction, and then pay taxes on the remaining $13k at the student’s regular rate (10%, 12%, whatever).
I hope it is fixed. I don’t think students should have to pay taxes on scholarships, but I really don’t think they should be under the kiddie tax. That is really unfair since I’m not in the 24% tax bracket and neither is my daughter. She ‘earned’ her scholarships and her earned income rate should be used.
Student has close to full ride. Low income, so gets insurance paid too, $1500. Room and board $15k and other expenses$500, net of books. Works for summer and school year and makes $6k. Maybe more in some internships. $23k. Low income or no taxable income parent. Do the math.
For kids who are getting full ride type merit awards and are from high income families where the parents’ marginal tax rate is edging up to that 37%, they can make out. But the kid with a single parent on social security disability or very low income… that one is hit with more tax. And if pay didn’t have much in tax witholdings because who was thinking about this last year, it can be a hefty bill for someone already on a very tight budget.
I haven’t seen an actual case of this as ithe very low income families I worked with did not have kids on full rides of that sort for college. Bad enough that there were recent college grads who ended up owing a lot more state tax because of that state’s formula that didn’t take that $12k deduction into account if kid was still a dependent that year.
@twoinanddone I agree! I don’t think students should have to pay taxes on scholarships at all. I also think the deductions/credits for parents paying tuition are too low.
@twoinanddone I agree, too. I also don’t think that research grants should be considered scholarship $$ and taxed at the same rate.
@cptofthehouse I am not disagreeing that it hurts poor students. I don’t know how to more clearly state that I wonder about the numbers used in the article. The article didn’t explain anything about the process of the old compared to the new. It simply stated 37%. As far as being informative, it isn’t. The old formula hurt poor students as well. I imagine that a student with $15,000 in excess scholarship $$ having to pay 10% on $12900 was hit hard in coming up with that $$. The way scholarship $$ is taxed didn’t make sense before.
@fidoprincess The proposed amendment you linked would change the tax rate for taxable scholarship/grant funds from unearned income (subject to the new trusts and estates rate) to earned income (subject to the student’s tax rate). This will definitely decrease the amount of tax owed if the dependent student doesn’t have very much earned income AND does not have any unearned income (interest, short-term capital gains, etc.)
Let’s say the student gets $10k in grants that exceed QEE. And let’s say that student earned $6k from part-time and summer jobs. The student had no income from interest, dividends, or short-term cap gains. Total earned income would be $16k. Minus this student’s standard deduction of $6350 (earned income plus $350) = $9,650. This would be the same under the current language and the new language (because currently scholarships are treated as EARNED income for the purpose of calculating the standard deduction).
The difference will come when calculating the taxes owed on the $9,650. Under the amendment, for a single person the tax owed would be $967.50. Under the current rules, in which dependents with unearned income are taxed at the trust and estates modified rates, the tax owed would be $1,714.00. Big difference.
. You are partially correct. For the purpose of calculating the standard deduction, scholarship in excess of QEE is earned income. But that does not mean the dependent is entitled to $12k standard deduction. The SD for dependents is as I stated above. You can look it up.
The greater of:
$1,050
OR
The individual’s earned income for the year plus $350 (maxed at $12,000).
The bottom line here is that the students from the low income families are the ones are vulnerable to a sharp spike in tax rates. For most students, due to the $12,000 standard deduction vs $6K under the old law, they will be taxed less or just a bit more. Using the old Kiddie tax rate, those kids from low income families were taxed less on the excess since their marginal rates were lower than high income families’ marginal rates.
Now that excess might be less under the new larger standard deduction but that whopping 37% tax rate for everyone means that the low income kid gets a sharp increase once that income hits a critical dollar amount. That amount can get up there since it includes true earned income, not just scholarship money. That last year in school ending at graduation could bring in a lot more $12k. Kid still a dependent.
It’s not just scholarship kids affected. I have one who just graduated. Room and board Stipend. Worked a few hours a week this last semester. Has a job that will be netting him a good salary this year. He’s my dependent. He’s going to be owing a lot more in taxes from that 7 month job than standard withholding tables will show.
10% of taxable income up to ETI* plus $2,550
24% of taxable income that exceeds the sum of ETI* and $2,550—but doesn’t exceed ETI + $9,150
35% of taxable income that exceeds the sum of ETI* and $9,150—but doesn’t exceed ETI + $12,500
37% of taxable income that exceeds the sum of ETI* and $12,500
*Earned Taxable Income (ETI) = taxable income minus NUI. (ETI is not the same as Earned Income, which is, in most cases, just total compensation received for services.) ETI is relevant only to computation of kiddie tax. ETI is a misnomer for children whose only income is unearned income; despite having no income earned from labor, they will still have ETI.
ETI = [(Earned income + unearned income) - dependent’s computed standard deduction] - NUI
Net Unearned Income (NUI) = unearned income minus $2100 (almost always comes to $2100).
NUI is unearned income that exceeds $1,050 PLUS the greater of $1,050 or the child’s itemized deductions related to the unearned income. NUI cannot exceed the child’s taxable income.
NUI = Unearned income minus allowance (usually $2100)