Yes. Using the 2018 Form 8615 and the Tax Computation Worksheet in the instructions for Form 8615, I come up with a tax of $1,563. This assumes that the $20,000 in taxable scholarships is the only taxable income (i.e. no earned income from wages, no taxable interest from bank accounts, no investment income, etc.).
wow, thanks for the information
Often Pell doesn’t cover full COA for a CC. It may cover tuition and books, but not room, board and living expenses. But many CC students live at home, so they “could” take the loan and save it for later.
I totally agree. Don’t say no to Pell to save for later. Instead, be disciplined, put in in a savings account and leave it alone for future college real needs. Don’t tell family members that it’s there! Judge Judy has had enough episodes where family members put high pressure on students to let them “borrow” their aid for some “emergency” and then they never pay it back. If friends and family don’t know that the savings exist, they can’t pressure you to borrow it.
I am glad I came across this thread, as I was unaware of this tax change. It affects us greatly as both kids are on full ride – hence bunch of taxable scholarships. My daughter also works a lot, especially over the summer, and I just assumed her tax rate from W-2 income is 10%. Now it’s actually 24% - big difference! I just created her 2018 tax return in HRB, and it turns out that’s exactly what it is.
BTW, I did OP’s tax return as well – assuming $20K in taxable scholarships and no other income – and the amount of tax owed was exactly $1,563 as @BelknapPoint calculated, plus $21 underpayment penalty (assuming no tax payments were made to the IRS in 2018).
I also added $3K of W-2 income to his return, simulating suggestion of other posters to get a job over the summer to pay for his federal tax bill. I also assumed 5% state income tax rate. If he makes exactly $3K, about $1.3K will be “gone” to federal, state, and FICA taxes. From what’s left for him, he will pay his federal tax bill. He will be left with about $100 to spend on himself, not accounting to cover state tax bill. So he will have to make more than $3K just to break even – kind of depressing for a young person with no money! And the more he works, the less his financial aid might become (I have no idea what school he attends and what the rules are, so this is just a general assumption).
It seems like working may not be the best way to pay the tax man. I would recommend taking out stafford loan, assuming OP did not receive financial aid up to full COA. If he did (usually there is about $4K “gap” between actual expenses billed and full COA), that means he has about $4K in his hands and can pay taxes out of that amount.
If your daughter has 2018 W-2 earned income from wages that will be taxed at 24%, that means she has taxable income over $82,500, and that’s after a standard deduction of at least $12,000. Right?
No, of course not, but the effect is exactly the same. Given her taxable scholarships of $15K, every dollar she chooses to make over the summer will be taxed 24% at the federal level.
Earning money is a plus…but so is having employment on your college student’s resume. Just saying.
Only unearned income above $2,100 (including taxable scholarships) is subject to the trusts and estates rates, where the 24% bracket is hit relatively quickly. Her earned income (W-2 wages) would still be taxed under the normal rates, where a single filer doesn’t hit the 24% rate until there is more than $82,500 in taxable income.
I agree. Our kids worked every summer since they were 15. I am just saying that unlike in previous years, every dollar she makes will be taxed differently, that’s all.
Here is what I was primarily responding to earlier:
Unless she has more than $82,500 in earned income from wages after the applicable deduction, her W-2 wage income will not be taxed at 24%.
Maybe we’re talking across each other, which can sometimes happen on an internet forum like this. If I have misinterpreted you statement from post #24, my apologies.
I understand your point about technicality of tax rate for different types of income. In practical terms, however, it makes no difference to students who already receive taxable scholarships that are larger than new standard deduction of $12K. The end result is that every dollar they earn in W-2 job will now be taxed at 24% vs. 10% before the tax reform of 2017.
It’s a matter of semantics. The dollars from the W-2 job are not being taxed at 24%; they are displacing taxable scholarship dollars that would otherwise be covered by the $12k standard deduction, and those taxable scholarship dollars are then taxed at 24%.
The recent tax reform may have helped or hurt in terms of the kiddie tax, depending on what your highest marginal rate is as the student’s parent, because that is the rate that would have been used to assess tax on the scholarships under the previous tax law.
Since this will affect many with huge grants or scholarships, can you further explain? Some of us aren’t that tax savvy in this area.
That’s the explanation. That’s how it works behind the scenes. The fact that technically W-2 income is not being taxed at 24% is just a matter of semantics. For all practical purposes, having large amount of taxable scholarships puts student into 24% tax bracket when they earn additional income through work.
I’m not tax savvy. Help me understand.
Taxable scholarship dollars = any grant/scholarship money used toward a Non-Qualified Educational Expense. Am I understanding this correctly?
https://www.irs.gov/credits-deductions/individuals/qualified-ed-expenses
I think both explanations have helped me wrap my head around this issue. (But as we used to say in grad school…do not dismiss something as “semantics.” What words mean is really important!). This is my last year doing the whole taxable scholarship thing, and the new tax law has me scratching my head on this issue, but I think I MIGHT get it now.
• There’s a $12000 standard deduction
• That SD gets applied to earned income first
• If the student didn’t earn 12K, the remainder of the SD will lower the amount of the taxable scholarship subject to tax.
• Earned income is taxed at one rate (whatever the tax tables say it should be) and the amount of the taxable scholarship (over $2100) at another, no longer the parent’s highest marginal tax rate but the estate rate of 24%
• So, yes, earned income increases the amount of the taxable scholarship that will actually be taxed.
Do I have it?
FWIW, I don’t see how anyone is ever worse off for earning money.
And yes @romns116 sounds like you understand it correctly.
Assumptions:
-Student is a single tax filer who is claimed as a tax dependent on someone else’s tax return.
-Student meets the criteria for her kiddie tax-defined unearned income to be taxed under the kiddie tax.
Scenario 1:
Student has $15k in taxable income, all from taxable scholarships.
After the $12k standard deduction is applied, $3k will be subject to tax (for deduction purposes, taxable scholarships are considered earned income). Since taxable scholarships are deemed to be unearned income for the kiddie tax, form 8615 must be used to calculate the tax owed. Using form 8615 and the tax computation worksheet in the form 8615 instructions, $363 will be owed. Starting in 2018, the estates and trusts tax rates are used to determine tax liability under the kiddie tax. The first $2,550 of unearned income is taxed at 10% (so, $255 in tax here), and the next $6,600 is taxed at 24% (only $450 of the $3k subject to tax remains, so that’s another $108 in tax).
$12k (all taxable scholarships) not taxed (covered by deduction)
$2,550 taxable scholarships taxed at 10% = $255 tax owed
$450 taxable scholarships taxed at 24% = $108 tax owed
Scenario 2:
Student has $20k in taxable income: $5k in wages from a job (earned income reported on a W-2) and $15k from taxable scholarships.
After the $12k standard deduction is applied, $8k will be subject to tax (again, for deduction purposes, taxable scholarships are considered earned income). In this scenario, all of the $5k in wage income is covered by the $12k standard deduction, which results in $5k more in taxable scholarship subject to the kiddie tax using the estates and trusts tax rates. All of the additional $5k being taxed under the kiddie tax falls in the estates and trusts 24% bracket, resulting in $1,563 tax owed, or $1,200 more tax owed than the scenario 1 result.
$12k ($5k wages + $7k taxable scholarships) not taxed (covered by deduction)
$2,550 taxable scholarships taxed at 10% = $255 tax owed
$5,450 taxable scholarships taxed at 24% = $1,308 tax owed
That’s a fabulous explanation with examples @BelknapPoint. I have a question for you…suppose the child is no longer a dependent? What replaces from 8615?
The $2,100 of unearned income (using the kiddie tax definition of this term) is only exempt from the kiddie tax in certain circumstances that depend on the type and amount of unearned income and the amount of earned income and how those amounts relate to the calculation of the standard deduction. For instance, in the scenarios that I provide in my post above, there is no standard $2,100 exemption of taxable scholarships from the kiddie tax, although $12k or $7k of taxable scholarships (depending on the scenario) has already been removed from taxation through the standard deduction. A taxpayer subject to the kiddie tax whose only income was $4k in investment income, for example, would use the $2,100 exemption from the kiddie tax rates: $1,050 would be covered by the standard deduction, and the next $1,050 would be taxed at the taxpayer’s marginal tax rate (presumably 10% under the lowest single rate). The remaining $1,900 would be taxed using the estates and trusts rates.