new kiddie tax with unearned income over $2100

[nwtaxlady]

I have a student that just started college in the Fall and last year Parents will claim him. So I requested the 1098-T and payment history etc. The student has scholarships in excess of tuition of $6531.
This is taxable income to the student. This is unearned income of over $2100. He has no other income. Is he required to file a return? and file a 8615? What should his tax be?

[TaxGuyBill]

If that is his ONLY income, he does not need to file.

Even though taxable scholarships are "unearned" income for almost everything, for purposes of the Standard Deduction, for some weird reason the IRS considers it "earned". That means if the Student has less than $12,000 of income, there is no Kiddie Tax on the scholarships. If it gets above the $12,000 Standard Deduction, it is subject to Kiddie Tax.

[Dude]

Student should report the overage as taxable so that the parents can claim AOTC. Otherwise there are no qualified expenses

[nwtaxlady]

It just seems weird to me that in a prior year, he would have been subject to the kiddie tax at the parents rate. And from what I read for this year, It says that unearned income over $2100 are required to file form 8615 and no longer taxed at parents rate, instead are taxed at trust & estate rates. And looking at a chart, it says if taxable income is not over $2550 then the tax is 10% of taxable income and if it is over $2250 but less than $9150 then tax is $255 plus 24% of the excess over $2550. So this must be taxable income from line 10 of the 1040 which in this student's case it is 0. Is that why this student is not subject because his income is not over the standard deduction?

[nwtaxlady]

Student should report the overage as taxable so that the parents can claim AOTC. Otherwise there are no qualified expenses

That is a whole nother subject! The student reporting the overage as taxable amount does not mean the parent can claim the AOTC. In order to claim the AOTC then the student would have to report all the scholarship amount ($32,000+) as taxable income. You can't double dip.

[Dude]

Nah, To get the max AOTC you need $4000 of qualified expenses paid from taxable funds.

[TaxGuyBill]

So this must be taxable income from line 10 of the 1040 which in this student's case it is 0. Is that why this student is not subject because his income is not over the standard deduction?

Yes.

That is a whole nother subject! The student reporting the overage as taxable amount does not mean the parent can claim the AOTC. In order to claim the AOTC then the student would have to report all the scholarship amount ($32,000+) as taxable income. You can't double dip.

No. In most cases you can add whatever you want to be taxable; you don't need to make it all taxable. So in many cases, you would want to make $4000 extra to be taxable (depending on the parents' Federal and State tax bracket, and if the student is subject to Kiddie Tax, you may want to only make an extra $2000 taxable, rather than $4000).

So in your case, if the total scholarships were $6531, you would probably want to tell your software to make $10,531 to be taxable (or possibly $8531). That then allows the parents to claim $4000 for the American Opportunity Credit. Of course, you would first need to make sure they would qualify for the credit, and that the parents' income isn't too high to receive the credit.

[nwtaxlady]

[



So in your case, if the total scholarships were $6531, you would probably want to tell your software to make $10,531 to be taxable (or possibly $8531). That then allows the parents to claim $4000 for the American Opportunity Credit. Of course, you would first need to make sure they would qualify for the credit, and that the parents' income isn't too high to receive the credit.[/QUOTE

Yes, I agree here. Take the excess beyond tuition which IS taxable PLUS make $4000 taxable to get the $10531 taxable. In this case still under the $12,000. The student will owe some income tax to our State but I will run the numbers and see which way the parent wants to file. I forgot about taxing it to take the credit. Used to do that years ago when they first came out with the HOPE credit. I didn't think they allowed you to do that anymore?

So back to the Original question here. This Kiddie tax seems miss leading. When they say does the child have unearned income over $2100. But then.... do they have other income?
For a dependent, is it under $12,000 ?

[TaxGuyBill]

I didn't think they allowed you to do that anymore?

So back to the Original question here. This Kiddie tax seems miss leading. When they say does the child have unearned income over $2100. But then.... do they have other income?
For a dependent, is it under $12,000 ?

It is still allowed.

https://www.irs.gov/publications/p970#en_US_2017_publink1000300227

It is confusing because all other unearned income is subject to a much lower Standard Deduction ($1050 if there is only unearned income), but scholarships are in weird spot that the Standard Deduction is still $12,000. So for any other unearned income, more than $2100 would start the Kiddie Tax rates, but for scholarships, it is only after $12,000 (assuming that is the only income).

[jmcdtax]

See article: https://www.irs.gov/pub/irs-utl/Pell...04%20pager.pdf Fact Sheet: Interaction of Pell Grants and Tax Credits ...

Allocate some or all of the scholarship to student housing expenses and use the remaining if any to cover tuition. This may allow parents to take advantage of AOTC. The student may have to pay taxes using this approach but the AOTC credit may benefit the parents, which could be used to offset student's taxes.

[nwtaxlady]

See article: https://www.irs.gov/pub/irs-utl/Pell...04%20pager.pdf Fact Sheet: Interaction of Pell Grants and Tax Credits ...

Allocate some or all of the scholarship to student housing expenses and use the remaining if any to cover tuition. This may allow parents to take advantage of AOTC. The student may have to pay taxes using this approach but the AOTC credit may benefit the parents, which could be used to offset student's taxes.

VERY GOOD article, Thanks! Yes, and as pointed out on the top of page 3 of this article, you may tax the Scholarship but YOU HAVE TO LOOK AT THE TERMS OF THE SCHOLARSHIP. Most scholarships are to be USED ONLY FOR TUITION, if that is the case then you can not make that scholarship money taxable, it HAS TO BE ALLOCATED TO TUITION ONLY. Alot of tax professionals are not aware of this.