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Kiddie tax and taxable scholarships

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Replies to: Kiddie tax and taxable scholarships

  • mommdcmommdc 11860 replies31 threads Senior Member
    For a dependent child who lives with you (other than temporary absence for college), it doesn't matter how much they earned, but rather how much of the earnings they spent on their own support as far as I know.
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  • DoinResearchDoinResearch 375 replies37 threads Member
    edited May 2019
    Hi all,
    I just read the NY times article, and thank you for this thread. I'm trying to get on top of this topic as D19 will be attending a school that meets 100% need, which after the loan, and the amount my D is contributing from part time work, comes to a payment from us parents of about $2800. Yes, I realize this is a very good problem to have, but I am concerned about being prepared for taxes. D19 was just awarded a $1500 scholarship, renewable for all years of college. D19 works part time, and is a dependent. Let's put her 2019 income at $6000. The amount of non-tuition scholarship is $7465 (towards Room & Board). Her income will be 6000+7465= 13465. If I understand it correctly, she'll receive the standard deduction of 12K. Does this mean that the 13465 income -12000 standard deduction = 1465 is what is taxable? Or is the 13465 the taxable amount? I'm confused how @BelknapPoint #3 post with the tax rates at different levels works with a standard deduction. I know this is basic information I should understand. I want to be sure we're prepared for the tax that comes with these very generous scholarships, as we can't easily absorb a large payment come 4/15/2020. We do have some 529 $, but that can't be used for taxes.
    edited May 2019
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  • mommdcmommdc 11860 replies31 threads Senior Member
    Support for child doesn't just cover tuition, also food/housing during breaks, and health insurance.
    IRS website has a support test worksheet.

    The need based aid the student receives, also scholarships and grants, is not student provided support. But work earnings and student loan proceeds are.
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  • mommdcmommdc 11860 replies31 threads Senior Member
    You might qualify for AOTC on the amount you or your daughter pay towards tuition/fees/books, and a dependent credit of $500.

    You can estimate the tax amount due and save that up during the year.
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  • DoinResearchDoinResearch 375 replies37 threads Member
    @mommdc I am trying to figure out an estimated tax due, so that we can make the adjustment in withholding now. I just don't understand if we're taxed on her part time job/work study job income combined with non tuition scholarship as a total figure, or less due to standard deduction for $12K. And yes, AOTC might kick in, just to add another moving part into the mix. Reading the NY Times article - it seemed that the non tuition scholarship amount ( for us $7465) was going to be taxed at 37%, and I've read this thread completely 3 times over, and I'm not clear what's taxable when a standard deduction is considered. We definitely support D19, she's a dependent, no question there. I can fiddle with turbo tax, but I find like to have a basic understanding.
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  • 3scoutsmom3scoutsmom 5656 replies338 threads Senior Member
    @DoingResearch just to be clear the student is taxed not you. Also most scholarships are paid out by the semester and since there's only one semester in the first tax year your student is in college they'll likely be fine for taxes the first year. The next tax year will have two semesters and that the one to be prepard for!
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  • BelknapPointBelknapPoint 4843 replies19 threads Senior Member
    Reading the NY Times article - it seemed that the non tuition scholarship amount ( for us $7465) was going to be taxed at 37%, and I've read this thread completely 3 times over, and I'm not clear what's taxable when a standard deduction is considered.

    I'm not reading the NY Times article because it wants me to log in or create a free account. But... your child will only be taxed at the 37% rate on any part of the income subject to the kiddie tax that exceeds $12,750.

    Does this mean that the 13465 income -12000 standard deduction = 1465 is what is taxable? Or is the 13465 the taxable amount?

    It's all "taxable," but the $12k deduction means that tax will only be computed on $1,465. Use 2018 tax forms and instructions, available at the IRS website (https://apps.irs.gov/app/picklist/list/formsPublications.html), and 2019 tax rates (https://www.forbes.com/sites/kellyphillipserb/2018/11/15/irs-announces-2019-tax-rates-standard-deduction-amounts-and-more/#6985d7062081) to do a hypothetical 2019 run-through for your daughter. Make sure you look at IRS form 8615 (the kiddie tax) and its instructions to see if it applies, and if it does use it in your 2019 estimate.

    The first year in college, especially with taxable scholarships and trying to utilize tax credits, can be very confusing. The second year and subsequent years are much easier. You are very smart to be thinking about this now instead of trying to hash it all out next spring.
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  • BelknapPointBelknapPoint 4843 replies19 threads Senior Member
    Also most scholarships are paid out by the semester and since there's only one semester in the first tax year your student is in college they'll likely be fine for taxes the first year.

    Many schools bill for and apply scholarships to the spring semester before the end of the calendar year. Be prepared for spring semester scholarships to count as income to the student for the previous tax year.
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  • 3scoutsmom3scoutsmom 5656 replies338 threads Senior Member
    @BelknapPoint I'll take your word for it, you have far more exerience with this stuff that I do but this is how it worked out for two of my kids at two different colleges so I guess it's something to check into?
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  • BelknapPointBelknapPoint 4843 replies19 threads Senior Member
    I'll take your word for it, you have far more exerience with this stuff that I do but this is how it worked out for two of my kids at two different colleges so I guess it's something to check into?

    Absolutely; once a school has been picked, ask the billing office what the timing is for billing the different semesters and how/when credits are applied.
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  • twoinanddonetwoinanddone 24075 replies19 threads Senior Member
    Both of my kids had scholarships and they were applied in Jan/Feb, even if the bill for the spring semester was issued in December. I kept all bills and credits in the same tax year. The schools did not post the merit scholarships until Jan. They were quick to post the charges but not so good about posting the credits. My kid who started back to school around Jan 6-10th range never had her merit scholarships, athletic scholarship, or state grants posted until after Jan 2.

    @DoinResearch If she ends up with $1400 in income, the tax software like Turbotax or TaxAct with do the calculations for you on that.

    I agree that in April 2020 she probably won't owe anything since her total income will be about $6000 + (1/2 of $7500)=$9500 and the standard deduction will cover that.

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  • DoinResearchDoinResearch 375 replies37 threads Member
    @BelknapPoint Thank you so much! Actually, S18 will be a sophomore, and D19 a freshman, and doing taxes via Turbo tax this year was very "taxing" (much of it I think was a software issue, and the AOTC credit didn't display in the tally until the very end when I ran a check/audit, it was as if the check/audit calculated the credit). Son got good aid, but it didn't extend beyond the cost of tuition so I really only focused on AOTC and made sure that was applied. The size of D19's FA package adds a new layer. And you answered my other lingering question, that it is a full year in 2019 because we pay the bill Dec. 2019 for 2020, which for AOTC purposes is good. So grateful for this forum.
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  • DoinResearchDoinResearch 375 replies37 threads Member
    @twoinanddone D19's school has the spring semester due 12/18, so i am hoping grants are credited, because my head might explode otherwise. I'd rather prepare for a full year 2019 in setting up withholding so we're not surprised. I at least think I have the basics down so when I do some estimates via tax software, I feel more prepared in answering the questions.
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  • brantlybrantly 4114 replies72 threads Senior Member
    @DoinResearch In my experience, the grants are credited on the first day of class of the semester. You should call the college FA office first thing Monday to ask. Or check the college's FA web page to see if that is addressed.
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  • BelknapPointBelknapPoint 4843 replies19 threads Senior Member
    edited May 2019
    And you answered my other lingering question, that it is a full year in 2019 because we pay the bill Dec. 2019 for 2020, which for AOTC purposes is good. So grateful for this forum.

    Please don't hate on me for bringing this up, but paying for a full academic year in one tax year can deprive you (or the student) of taking five years of education tax credits. This is because a normal course of four academic years will take place over parts of five tax years. Since the tax credits depend on when the expenses were actually paid and are not based on what calendar year the academic period occurred, one way to still be eligible for five years of education tax credits is to wait until January of the senior year to pay the senior spring semester expenses.
    edited May 2019
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  • BelknapPointBelknapPoint 4843 replies19 threads Senior Member
    DoinResearch In my experience, the grants are credited on the first day of class of the semester. You should call the college FA office first thing Monday to ask. Or check the college's FA web page to see if that is addressed.

    This will of course vary by school, and in contrast my experience has been that the school will bill for expenses and credit grants and scholarships in early December for a spring semester that begins in mid January.
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  • twoinanddonetwoinanddone 24075 replies19 threads Senior Member
    ^^As I said, daughter's school was the opposite and I know that the Florida state grants/BF would never be credited before the first day of the semester (BF wasn't applied until after the drop/add period as the amount wasn't set, so could be 6 weeks after the semester started). I don't think federal aid can be applied any sooner than 10 days before the semester starts, so could be in late Dec but most often is going to be in early Jan (Pell grants, SEOG, and loans -but those don't matter for taxes).

    So you could have the worst of both worlds - some grants in Dec, some in Jan. I'm grateful D's were always in Jan and I kept all the billing in the right tax year.

    Even though we had that 5th tax year, she got not tax benefit. I'd used the 4 years of AOTC and all she would have qualified for was the LLC, but she didn't have any qualifying payments since tuition was covered by scholarships.
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  • BelknapPointBelknapPoint 4843 replies19 threads Senior Member
    As I said, daughter's school was the opposite...

    Look, I'm not disputing that anyone had a different experience. Different schools will bill at different times, and the credits for different types of aid will post at different times. My experience is with school X and institutional aid. School Y and federal or state aid may very well do things differently. I get that.

    To parents: find out what your kid's school will do with the billing and type of aid that your kid is receiving.
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  • mommdcmommdc 11860 replies31 threads Senior Member
    edited May 2019
    I believe federal aid can't be disbursed until 10 days before term starts.

    School 1 usually posts scholarships, grants and loans exactly 10 days before term starts, but if spring term starts on Jan 7 and 10 days before would fall on a day that the FA office is closed, then it might not post until beginning of January.

    School 2 seems to wait until after add/drop to post the aid.

    My D had $7,000 in work income and $4,000 in taxable scholarships.
    The standard deduction covered that and no tax was due. I think she received about $400 back from tax that was withheld from her paycheck.

    Next year the standard deduction will increase a bit. Also book expenses can also be subtracted from scholarships and grants to arrive at taxable amount, in addition to tuition and fees.

    A few years ago my D reported grants as taxable that covered housing, and tuition scholarship was tax free. We in turn claimed the fees and books towards a partial AOTC.

    Back then the standard deduction for dependent students was only around $6,000 so she owed about $150 in kiddie tax (which we paid for her), and we got about $1,000 in AOTC.
    edited May 2019
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