College student with earned and unearned income

Forum|Forum|3 years ago
February 16, 2023
2 replies
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My 23 YO has $6500 in earned income reported on W2’s with no federal or state taxes withheld. She also has $8600 in unearned income on a 1099-g specified as a taxable grant. I am claiming her as a dependent. I’m baffled on how TT is calculating the tax on this scenario, more specifically for the earned income portion. I do understand that the unearned portion over $2300 is taxed at my rate which bumps up the tax for her significantly, but how is the earned portion taxed? Is the total of earned and unearned added together to determine the standard deduction? I would have thought that earned portion would be tax free since it’s under the standard deduction for single filers.

TurboTax Deluxe Online

KrisD15

Her standard deduction as a dependent would be 6,900 (earned plus $400)

According to the IRS:

"Dependents – If you can be claimed as a dependent by another taxpayer, your standard deduction for 2022 is limited to the greater of: (1) $1,150, or (2) your earned income plus $400 (but the total can't be more than the basic standard deduction for your filing status)."

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Hal_Al

Employee

@Mrbobwoj said " She also has $8600 in unearned income on a 1099-g specified as a taxable grant. "

What is the source and purpose of the grant? If it is essentially a scholarship, it is not fully treated as unearned income. Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400). It is not earned income for the kiddie tax and other purposes (EIC. IRA contributions or additional child tax credit).

The trick is to get TurboTax(TT) to treat it as earned income for purposes of the standard deduction. Do not enter the grant at the 1099-G place, in TT. Instead, enter it in the educational expenses and scholarships section. After entering your 1098-T, you will be asked if you had any scholarships not included on the 1098-T. Enter there. When asked how much of the grant was used for room and board, enter the 1099-G amount. That makes it taxable (R&B is not a qualified expense). Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.