Kiddie Tax, 1098T, and Unearned Income

Forum|Forum|5 years ago
February 22, 2021
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I have a quick Kiddie tax question. I know the rules have changed for 2020 and such.

My son is a Freshman in college. He’s was 18 when 2020 ended. He has earned income from a job of around 10.9k. He also received scholarships 7,416 of which 3,570 was used for qualified tuition expenses. The difference is represented on line 1 of the 1040 to the left with SCH next to it. So it’s treated here as earned income. He’s been filing his own tax returns for the last couple of years to recoup withheld taxes. In 2020 he’ll do that plus add the school stuff.

My question is this….the total income between his job and taxable scholarships is more than the 12,400 standard deduction by about 2,478. His unearned income (dividends and interest) is only 106. It seems like 2,478 won’t be subject to the kiddie tax because his unearned income is less than 2,200. At least that is how I read it. However, I’ve read many blogs and such and some people say that the taxable scholarships are unearned income (even though that is not how it’s represented when putting it on the 1040). If it’s unearned income that would force my son to also file form 8615 and pay tax on the 2,478 at my rate instead of his, costing him more money.

What are your thoughts on this? I’d rather not file the 8615 as it’s about a 500 dollar swing in taxes and a lot more information. As an FYI, I’m in the 24% bracket and ineligible for any education credits due to income (not sure that affects the answer above, but some background if needed). I did put the 1098T on my returns and did get some dollars back due to expenses above and beyond the scholarships.

Thank You…

Best answer by Hal_Al

He will not be subject to the kiddie tax. i.e. he will not have to file form 8615,

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,400 filing requirement and the dependent standard deduction calculation (earned income + $350) and the kiddie tax. It is not earned income for other purposes (EIC. IRA contributions or additional child tax credit).

Side issue:

"I’m...ineligible for any education credits due to income".

"I did put the 1098T on my returns and did get some dollars back"

Those two statements don't jive.

Hal_AlAnswer

Employee

He will not be subject to the kiddie tax. i.e. he will not have to file form 8615,

Side issue:

"I’m...ineligible for any education credits due to income".

"I did put the 1098T on my returns and did get some dollars back"

Those two statements don't jive.

joboosAuthor

Thanks @Hal_Al . For the side issue TT told me that I was ineligible for the lifetime learning credits and other income limited credits, but when I entered in the expenses and stuff it did lower my tax bill, but not that much. So, not really sure what kicked, in but TT did tell me to enter in the info anyway despite not being eligible for typical credits/deductions based on income.

Thanks for confirming that I don't need to enter in Form 8615 on my son's return. Not sure I totally understand your answer on why though. I get the part of adding the scholarships to his earned income to force me to file a return (which I was going to do anyway to recoup withheld taxes), but not sure I understand No Kiddie Tax decision. Are you saying that for Kiddie Tax purposes the scholarships are "earned" income and because he didn't really have any other significant unearned income his free and clear of the kiddie tax?

Thanks Again!

Hal_Al

Employee

Q. Are you saying that for Kiddie Tax purposes the scholarships are "earned" income and because he didn't really have any other significant unearned income his free and clear of the kiddie tax?

A. Yes. As you observed, taxable scholarship goes on line 1 of form 1040 with wage earned income.

You should look closer at the the tuition credit situation. If eligible there could be a lot more $ available (see below). On the other hand, if you just noticed the "refund meter", at the top of the page, change, they might have just been a temporary anomaly.

Review any forms (8863 or 8917) generated for details. The American Opportunity credit has a higher income limit ($90K / 180K MFJ) than the Lifetime Learning Credit or Tuition and Fees deduction.

If you did use some of his expenses to claim a credit or deduction, that night increase the amount. of scholarship, he has to claim as income.

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There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.