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Kiddie tax and taxable scholarships

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Replies to: Kiddie tax and taxable scholarships

  • cptofthehousecptofthehouse 28056 replies56 discussionsRegistered User Posts: 28,112 Senior Member
    Room and Board is $13k. That right there is more than what the the student earned unless she had as fund of some sort from which she was drawing for living expenses. I’m assuming the information given is correct and complete as to what this woman is getting. Note that it is irrelevant how much or little the parent has to be contributing to the support in order to claim her as a dependent.
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  • Twoin18Twoin18 1387 replies16 discussionsRegistered User Posts: 1,403 Senior Member
    edited May 23
    @cptofthehouse The $13K scholarship for room and board is not counted as money received from the parents, or anyone else, it is simply ignored in the calculation. See https://www.irs.gov/pub/irs-pdf/i8615.pdf:
    "Your support includes all amounts spent to provide you with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your support, count support provided by you, your parents, and others. However, a scholarship you received isn’t considered support if you’re a full-time student."

    The "$3K from part-time job" is in earned income and the $4K summer research fellowship might or might not be earned income. So if the student has free room and board and tuition fully covered, and is staying at college during the summer (so travel expenses may be limited and there will be no attributed parental support from the deemed cost of living at home) then it is quite plausible that parental support (for clothes, healthcare, etc.) could be less than $7K total for the year, which would mean the student may have earned income equal to more than 50% of her own support (if the fellowship is earned income). In that case the student would be exempt from the kiddie tax. She may then also decide to declare some of her tuition scholarship as taxable and take the AOTC credits herself rather than the parents doing so.

    And with regard to this statement "Note that it is irrelevant how much or little the parent has to be contributing to the support in order to claim her as a dependent" to be a qualifying child "The child must not have provided more than half of his or her own support for the year." and to be a qualifying relative "You must provide more than half of the person's total support for the year" and "The person's gross income for the year must be less than $4,150" (see https://www.irs.gov/publications/p501#en_US_2018_publink1000196863). So if the student is providing more than half of her own support, she cannot be claimed as a dependent.
    edited May 23
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  • mommdcmommdc 11239 replies29 discussionsRegistered User Posts: 11,268 Senior Member
    Yes, kiddie tax looks at earned income in relation to support.

    But for the purpose of claiming college student as dependent, I believe it matters how much of earned income the student actually spent on their own support. Some students earn money and then save it.
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  • collegemom9collegemom9 704 replies22 discussionsRegistered User Posts: 726 Member
    I have a question...how does reporting all of the unearned income from scholarships and grants affect EFC for the future?
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  • Twoin18Twoin18 1387 replies16 discussionsRegistered User Posts: 1,403 Senior Member
    "But for the purpose of claiming college student as dependent, I believe it matters how much of earned income the student actually spent on their own support."

    For the dependent test, earned income doesn't come into it. The support can cone from the student's own savings not just income. It is about who provided the support, as noted above.
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  • mommdcmommdc 11239 replies29 discussionsRegistered User Posts: 11,268 Senior Member
    Yes, but the support test asks what the student spent from earnings, savings, loans etc on their support.

    I was trying to explain that simply because a college student who is considered living at home (with temporary absence at college), earns a lot, that doesn't mean that they can't be claimed as the parent's dependent.
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  • mommdcmommdc 11239 replies29 discussionsRegistered User Posts: 11,268 Senior Member
    edited May 23
    The FAFSA asks in question 44d how much in taxable scholarship the student reported as part of AGI and then subtracts that from student income for the EFC calculation.

    https://fafsa.ed.gov/fotw1920/help/fotw29c.htm
    edited May 23
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  • cptofthehousecptofthehouse 28056 replies56 discussionsRegistered User Posts: 28,112 Senior Member
    edited May 23
    The $4150 earnings limit is not applicable to full time students under 24.

    The FAFSA numbers do not come into play here. The issue is whether this student is a dependent or not for tax purposes. The issue of focus is whether the student provided more half of own support for education, food, lodgings etc as defined by the IRS. Clearly we do not know what is out there in additional money so I’m sticking with what is posted. The Summer research fellowship is categorized as non taxable.
    edited May 23
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  • cptofthehousecptofthehouse 28056 replies56 discussionsRegistered User Posts: 28,112 Senior Member
    Where it gets tricky is that college is considered a temporary absence from home. Since room and board scholarships are not considered in the picture, parents can claim the cost of having a place st home for s college kid, whether he used it or not. My son was home for maybe 2 weeks last year. He had room and board covered at college. But we maintained a place for him here at home. His clothes, bed, teddy bear, mementos all here. When we visited him or he came home, we fed him. Would he be a dependent for 2018, if he also had a full tuition scholarship? Yes, he had earnings over the summer and during the school year. Without the scholarships, did he provide more than half of his support? Do we count the cost of his room at home?
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  • cptofthehousecptofthehouse 28056 replies56 discussionsRegistered User Posts: 28,112 Senior Member
    Here’s the crazy thing here: the scholarships do not count as support any one , but they are part of the expenses. If a kid is racking up expenses at college for which the taxable scholarship is covering, he can’t claim any of that as what he is paying. The student has to be racking up expenses over and beyond that $13k that is on the table. It’s not like that expense is ignored. He has that expense but it is being taken care of by scholarship— He’s not paying it. So it’s not likely that he’s paying it, certainly not in that example where earnings is not there— unless there is a fund from which the kid is drawing the money.

    The kid has to be paying more half of the cost of the expenses he is incurring to be non dependent. Note that it doesn’t say the parents have to be contributing anything in the publication.
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  • collegemom9collegemom9 704 replies22 discussionsRegistered User Posts: 726 Member
    @cptofthehouse My question thought is if you're adding in say 10k in unearned income for the student how does this affect their EFC in subsequent years? Does it get added into their AGI?
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  • cshell2cshell2 160 replies3 discussionsRegistered User Posts: 163 Junior Member
    @collegemom9 - the income is added to the AGI for tax purposes, but then subtracted from the income on the FAFSA for calculating the EFC.
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  • cptofthehousecptofthehouse 28056 replies56 discussionsRegistered User Posts: 28,112 Senior Member
    @collegemom9 , yes it is part of the AGI. But FAFSA adjusts that on their own form with the question asking how much in taxable scholarship a student received.
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  • collegemom9collegemom9 704 replies22 discussionsRegistered User Posts: 726 Member
    @cptofthehouse AHHHH that makes sense, phew!
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  • cptofthehousecptofthehouse 28056 replies56 discussionsRegistered User Posts: 28,112 Senior Member
    There was a case that my oldest still gets huffy about, some years ago in our area. Kid left home, moved in with boyfriend, went to college fulltime with part time job. Parents apparently did not give a dime towards this.

    Come tax time, parents claimed kid as dependent. Kid challenged it and lost. Just because parent didn’t pay, didn’t mean kid paid for more than 1/2 of what it cost on that IRS sheet. It wants your bank balance. beginning of year, income-not counting scholarships, but including loans, and then the ending balance and if student doesn’t come up with paying those more than 1/2 expenses, student is dependent. Doesn’t matter if it’s scholarship, sugar daddy or anyone else paying them. Student has to show that it’s coming from self. Insult upon injury, the parent can claim AOTC.

    There are ways around this if a student is determined to be deemed independent but it has to be done in a verifiable way.
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