Oh, thanks for that clarification on the AOTC. Now I’ll have to do MORE calculations to figure out the sweet spot, it might be just the first 2,000. Have to consider state taxes as well as federal. Thank goodness for computers.
We also had to take into account family reported income for purposes of the Obamacare subsidy. If a child is required to file a tax return their income has to be included in calculating the subsidy.
Sometimes you need to set aside the tax software for a minute and work this out on paper. The software is a black box so to speak and one can’t really tell sometimes if they are inputting the correct info to produce an output.
Walk through publication 970 worksheet 1-1. First of all, even if the student is a dependent the scholarship is his/her own income. NOT the parents’! And even if a dependent, that just means the kid can’t take a personal exemption and his/her standard deduction is likely to be reduced to $6200 from $10150. Look at the applicable 1040/A/EZ instructions for that.
In my sons case he received $27.7K in scholarships and fellowships. He had QEE of $13.6K. Taxable was $14.1K. After a standard deduction of $6.2K, he is being taxed on $7.9K. At his rate of 10% that is $790.
Again, I haven’t read all you are looking at here, but I suggest you read over scholarships and do the worksheet from pub 970. Then work out the tax using simpe forms and hand calcs. You can use the software once you see how it should come out and do not convolute his return with your own.
Finally, I should note that it may be beneficial for some QEE to be kept off of his return and used on your own if you qualify for a credit or deduction and your rate is higher (true most times!) than your chid’s. You are allowed to do so unless the scholarships has specific requirements such that it pays for 100% of your child’s QEE. In my case my son’s paid for all tuition, but then the balance could be used in any way for non-QEE like rom and board. So I ket all of his book and other associated QEE on my return to get better advantage with it there than at his 10% rate. The tradeoff was that he just had more “income” to be taxed at 10% while I still received a credit for much more than that.
^^I’m pretty sure that taxable income in this situation is unearned by IRS definition (scholarship -QEE) and therefore taxed at parents rate, so this works if your rate is also 10% not so much if higher. Someone correct me if wrong.
But in doing so, don’t miss the change in the kiddie tax definitions(form 8615) that started last year.
If you’ve done it manually and haven’t yet used the software, it should catch that for you if applicable. The amount of his unearned(for this purpose) taxable income over $2000 should have been taxed at the parent rate.
^^ @OhDad3, I’m afraid you seem to be blissfully unaware of the nasty Form 8615. After reading your post, I quickly skimmed through Pub 970, and the 1040A, and the 1098-T to see if maybe, just maybe you missed a reference to the wicked 8615 amongst all those publications and forms – something directing you to the Form 8615. But, at least in my quick skim, I did not see any such reference!
And that’s the beauty of the “black box” you speak of – it will generally direct you to all of the required forms for your tax situation, though I agree with you that we all have to wear our thinking caps while using the software.
Anyway, here is the purpose of the Form 8615:
It sounds like your son will have to file one as well. All of his taxable scholarship amounts above $2000 will be taxed at your rate, if your rate is higher than his. That’s the rub. It stinks!
@OhDad3, my son’s tax bill was something like $216 without the Form 8615. And it was over $4000 with the 8615! It is a bear. Good luck!
The definition change to form 8615 starting in 2013 is bolded in this quote:
This is an unusual situation for someone not yet in college and would appreciate your thoughts.
I’ve been mentoring a high school senior on college admissions. His EFC is zero. If he gets into a full need school, my understanding is that the amount of need based aid for room and board would be considered taxable scholarship. However, the earnings for him and his custodial parent may be so low that they would not have to pay any taxes.
Does that seem about right – that there probably wouldn’t be any tax liability in that case?
No, a zero earned income doesn’t mean no taxes on the full scholarship, full Pell, maybe other awards too. It depends on how much he gets in scholarships and how much the QEE is. If the COA is $40k, and $25k is QEE and $15k is ‘other’ (room, board, transportation, misc expenses), that $15k would be taxable to the student and on the student’s tax return. The student would get standard deduction (but the personal exemption would probably go to the parents) so the student would be taxed on approximately $8800 at the parents’ rate, which might be at 10% or might be higher.
SimpleLife and annoyingdad,
You are indeed correct on all counts and yes I was blissfully unaware. I violated one of my own rules which is to NOT do anything in haste (including a reply such as I posted), but to take time with my own thoughts for awhile. I had only just started returns for this year using the same online software I’ve used for years and had them sitting there half complete and not yet filed. My son is a freshmen '14-15 and I had not dealt with scholarships for about 3 years. To make matters worse, my “black box” was NOT catching the 8615 requirement. Probably should change as this is a confidence issue with this product now. Luckily it won’t be as bad for me because some of his “scholarship” (stipend) funds are W-2 reported. Seems unfair that if one does not get the W-2 but otherwise had to still “earn it” (say research lab work), it still goes as “unearned” income.
Frustrating that a law that was meant to “fairly” tax investments that parents were hiding in their children’s names is now treating scholarships this way. I can’t manipulate a scholarship that the child earned like an investment that I set up in their name.
Thanks for the heads-up!
^^I so agree @OhDad3. D’s school sweeps the account before each semester and applies scholarship to bills. So tuition and on-campus housing paid automatically and overage is direct deposited to D’s checking to mostly be used for food. It never even touches an account that, as parents, we have access to. If it has to be unearned, then at least let it be at child’s rate.
Yes, @OhDad3, I couldn’t agree with you more! It’s just so unfair and illogical that I kept thinking there must be a way around it. But, nope. I sure can’t find one. Sad.
(Oh, and @scmom12, my kids’ schools handle scholarships the same way. The leftovers go directly into the kids’ bank accounts after all expenses are paid. Even if I did have access to the money, what kind of parent is going to use the kids’ scholarship money for their own purposes?? It’s absurd that any of it is taxed at the parents’ rates.)
So the kiddie tax history goes back to the 1986 “reform”.
Looking at the past years forms on the IRS site, one can see them as early as 1990. At that time it was strictly for children under 14 years old and investment income over $1000. By 1992 that threshold was $1600 and stayed that way until 2005. But in 2006 that became $1700 AND included children to age 18. And by 2008 it just became the now “certain children” so that if over 18 but a full-time student to age 24 …
… and finally, as already pointed out by annoyiongdad, scholarships were added as “unearned income” in 2013.
I’ve been trying to follow this thread and pull together a 1040 and 8615 for DD and can’t figure it out! Basically it seems that excess scholarships are “earned” income for the 1040 but “unearned” income for the 8615? So she had $3700 in scholarships that were in excess of qualified expenses (books). All other expenses (tuition, fees, room & board) were paid with distributions from 529 accounts. She had no other “earned” income and no other “unearned” income (interest, dividends, etc). And she’s 18 not 19 (not sure if that matters).
According to Publication 501, she doesn’t have to file a return (1040) because her “earned” (scholarship) income was not more than $6,200. But according to the instructions she has to file 8615 because her “unearned” (scholarship) income was more than $2,000. But the 8615 asks for her taxable income from the 1040 she doesn’t have to file! And if I do a 1040 for her, what is her “taxable” income - the excess scholarship amount? Does that go into line 21 (Other income) and get listed as scholarship income? And then is her “standard deduction” $1,000 because we claim her as our dependent?
This is so confusing!! Thanks for any help anyone can give!
akmom124, I’m kind of confused. You made her scholarships taxable so you could use 529 funds for tuition, fees and room and board? The only qualified expenses you used to reduce her taxable scholarships was the cost of books?
That’s a little different than we see normally see here.
But, in any case, if all her earned income(including taxable scholarships) + $350 is more than her earned income then she doesn’t have to file and doesn’t have to worry about the 8615. The max is $6200.
If you choose to file anyway, the taxable scholarships go on line 7 of the 1040, though I would file a 1040EZ. She gets the full standard deduction of earned income(including taxable scholarships) + $350. Again, $6200 is the max. Taxable scholarships are earned income for the standard deduction as well as the filing requirements. Even if you file a return, the 8615 won’t come into play because after the standard deduction she won’t have $2000 of unearned income for the 8615.
Here’s how you enter the taxable scholarships on the tax forms, from Pub 970, chapter 1:
Exactly. Annoying, isn’t it? It drives me crazy! They have us coming and going. No fair!
Anyway, I can see why you’re confused. (A) It’s all confusing as h-e-double-l. And (B) Your daughter skims the edges of all the different rules such that it’s doubly confusing!
But, it seems to me that she can rest easy. There is no requirement to file IAW the instructions on either form.
As you noted, she is not required to file a 1040 because her “earned income” (taxable scholarships) does not exceed $6200.
And, she is not required to file a 8615 because she does not meet condition number 2 of the Who Must File instructions for the 8615. Here’s a copy and paste of that paragraph again:
See? She doesn’t meet Condition #2 – she is not required to file a tax return.
So, it sounds to me like she’s off the hook (you’re off the hook) for this year! Whoot!
Thanks @annoyingdad - I know it’s a little different. We have the money in 529 accounts and since she didn’t have a job wanted her to be able to use her scholarship money for books and some spending money and hopefully save it to cover things we can’t use the 529 for - like airfare for study abroad. Plus I’m not sure how much she’ll earn this summer if she chooses to work as a volunteer or unpaid job with an organization serving the homeless. I’m thinking filing may be a good idea anyway to fulfill IDOC requirements too.
@SimpleLife - Thanks! You’ve convinced me! No filing for her this year! Yay! Now on to the FAFSA. One good thing about being snowbound for so many days is I’ve been working on taxes fairly early and getting things done. Although I’d much prefer the snow to go away and stay away!
Great! Glad I could help. And glad to hear that you’re making the most of your “snow days!” Good luck with it all!