It is indeed very confusing with scholarship/grant in tax return. I have entered everything in H&R Block a week ago so that I could submit FAFSA with current data. Then I changed everything yesterday to make the grant an unearned income for my D so that I can claim more tax credit. At the end, we saved some money but my D needs to pay more state income tax. The software did guide me to fill the 8615 worksheet. However, I don’t need to file Form 8615 at the end. Filing tax became so complicated that I don’t think I can do it anymore without a software.
OK just when I thought we had this down…doing D’s taxes and entered figure for books. Were asked if books were required to be purchased from the school. According to pop-up to be QEE they have to be required by school, bought at that school (and aren’t available from another source) and the school is the one paid. Really? Required textbooks are only covered if the only place you can get them is from the college you’re attending? New for this year?
For which purpose is this? Which credit? There are different QEE definitions for different purposes.
For the AOTC, my software asks for books purchased from the school in one question and then asks for books purchased elsewhere in another question. But if this is the AOTC you’re talking about, you’re right, books and supplies don’t have to be purchased from the school, you just need receipts to back it up.
The 2014 IRS Pub 970 just became available and I’m not seeing any change in that for 2014.
I totally understand your confusion. Just as Taxable Scholarships morph between “earned income” and “unearned income,” QEE definitions change depending on the particular situation.
529 Plans? Books and supplies don’t have to be purchased from the school to count as QEE.
American Opportunity Credit? Books and supplies don’t have to be purchased from the school to count as QEE.
Lifetime Learning Credit? Books and supplies will count as QEE only if you must pay the institution directly and if they are required as a condition of enrollment or attendance.
I know there are other forms and situations, too, in which Books and Supplies come up … but I can’t think of them right now.
But, yes, you’re correct, @scmom12. The definition morphs depending on the situation, and if your program tells you that they need to be purchased directly from the school and required by the school as a condition of enrollment, in the situation you’re trying to figure right now, then my guess is that your “pop-up” is correct. Are you working on the Lifetime Learning Credit right now?
Copied and Pasted from TurboTax (italics are mine):
"There are small but important differences between the American Opportunity Credit and the Lifetime Learning Credit when trying to figure out which expenses can be claimed as qualified expenses.
Qualified education expenses under the American Opportunity Credit are:
*Tuition and student-activity fees are included only if the fees are paid to the institution as a condition of enrollment and attendance.
*Expenses for books, supplies, and equipment needed for a course of study whether they are purchased from the educational institution or not.
Qualified education expenses under the Lifetime Learning Credit are as follows:
Tuition, student-activity fees, and expenses for course-related books, supplies, and equipment only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance."
Okay. Humor me if you will and someone check me on this. It’s bothered me that this is easy to understand once you are aware of the requirement, but that becoming aware of the requirement itself is buried until one reads the language on the 8615.
Assume a dependent student HAS some taxable scholarship income and MUST FILE. That is …
- greater than $6200, therefore must file (e.g., chart B on page 7 of 1040EZ Instr ... "earned income" over $6200)
- is eligible to use 1040EZ (see the checklist on page 5 of 1040EZ Instr)
- will not use any tax software; just fills out 1040EZ using the instructions and taxable scholarship worksheet from Pub 970
Where will this filer ever be directed to utilize a tax rate different from their own?
After walking through this, I’ve also searched “scholarship” and “8615” on the PDF of the 1040EZ and 1040EZ Instr and nothing would lead the filer to believe that taxes are due at any rate other than their prevailing rate or to file another way or use another form.
I’ve surely missed something again, right?
^^^ Looks like I cross-posted with annoyingdad.
Yeah, @OhDad3, you missed something. Have you looked at the Form 8615? It effectively has you filing at the parent’s rate or the child’s rate, whichever is higher. Typically, the parent’s rate is higher, right? So that’s what you’ll basically end up with. Well, there’s that little “credit” that gets taken off the top of the child’s unearned income (or, in this case, taxable scholarships) – the $2000. It’s not exactly the parent’s rate, but it’s close.
Here’s a good explanation of it Copied and Pasted from Turbo Tax. This particular explanation talks about the kid’s “investment income.” Perhaps it was written before 2013 and copied and pasted into their FAQ’s. I don’t know. But nowadays, taxable scholarships also count as “unearned income” for the purpose of the Form 8615, as we’ve all learned the hard way.
Anyway, read “unearned income” or “taxable scholarships” wherever you see “investment income,” if that helps.
(Not all of the guidance here will necessarily apply to your child. You said that your child has to file, for instance. But this is still an explanation of how your tax rate is applied.)
Here you go:
"How does the tax work?
The tax kicks in only when your child’s investment income exceeds $2,000. The first $1,000 reported on your return is tax free, the second $1,000 is taxed at the child’s rate.
Unearned income above that amount is subject to the Kiddie Tax – that is, your marginal tax rate. Marginal tax rate is your highest rate applied to the last dollar you earned. That could be as high as 28, 33, 35%, or 39.6%.
You can pay the kiddie tax in either of two ways:
Include your child’s investment income on your tax return (using Form 8814), or
Have your child file a separate tax return (using Form 8615).
The tax on your child’s income will be the same either way.
The first option, while more convenient, could increase your taxable income and prevent you from taking certain deductions and credits, such as those for education.
In the second option, your taxable income won’t take a hit. But your tax rate will still be applied on the investment income reported on your child’s return because your name and Social Security number will be listed on the child’s return. If you file as married filing jointly, be sure to list the name and Social Security number of the parent whose name is first on the joint return.
Either way, TurboTax will guide you through the tax, whether you include your child’s investment income on your return or have your child file a separate return."
Thanks @simplelife and all…the problem on turbo tax is you don’t really know what it’s doing. We were entering books for older child for last semester senior year so it sounds as though it automatically used rules for Lifetime Learning Credit since we had already used AOTC for 4 years…it just never said what it was doing, just popped up questions. After that was we realized we had already used up our 4 years. It certainly would be more user friendly if it had said " you can no longer take AOTC, for LLC continue" or something similar.
^Right. I agree. Turbo Tax tends to ask all the questions at once and then applies your answers where it needs to. But rest assured, if you’re looking at 529’s or American Opportunity Credit, you can (and Turbo Tax should) use all required books and supplies as QEE, no matter where they were purchased.
@SimpleLife and all,
As I said, I understand completely and have no confusion whatsoever regarding the tax and how it applies since my second post in this thread. I know what the issue is and tax that is due and how one arrives at it.
All I’m saying is to take the perspective I described and walk through it. If a college student filing for the first time ever starts working through the 1040EZ with taxable scholarship income, I am not seeing where that particular individual would ever be directed to work an 8615 at all! Forgetting the software which should catch it, these forms/instructions should work like a flowchart always providing a directed step at a decision point.
Walk through the several lines and couple of instructions of the EZ (i.e., use the simplest form for which eligible). I don’t believe one will ever arrive at filing the tax at the parents rate following those instructions. Poor execution by the IRS if this is the case.
^I see, @OhDad3. That’s what I said back in my first reply to you on this thread. When you first wrote in, because I saw that your do-it-yourself method had left you blissfully unaware of the 8615, I responded to you that I skimmed the 1040 instructions (and then some) to see if there was any reference at all that would point you or your child towards this form. I didn’t see one (though I did quickly skim). I agree with you. It’s pretty weird.
I misunderstood your latest question. I thought you were basically asking this (in bold):
But now I get the intent of your question. You wanted to know how a filer would have known about the 8615 by simply following the 1040 instructions. Yep. I noticed that, too. I can’t see how a filer would have known. That’s one of the benefits of the software, I guess.
^ See? From me when you first wrote in:
I switched to H&R Block completely this year. Once I entered the scholarship/grant as unearned income for my D, it told me to fill the 8615 worksheet on my own tax return. Nevertheless, it also said I don’t need to submit Form 8615 at the end after filling the worksheet. YMMV.
^Hahaaa. Ridiculous. It’s all so complicated and annoying!