For m 8615 kiddie tax calculation (which applies to taxable scholarship income)

Paying for College
1

I thought I understood how the tax was calculated for unearned income from taxable scholarships, that the parent’s highest marginal tax rate is used.

But when I did our taxes today, the amount the tax software caculated was higher than the net earned income multiplied by our tax rate.

Well after looking at the lines on the 8615 filled in by the software, I finally understand.

The tax is calculated by adding the net unearned income (the lower of taxable scholarship income minus $2,100 or amount of taxable scholarship income minus standard deduction) to the parent taxable income (line 43 1040) and then figure the tax on that and subtract the original tax that was computed on the lower parent income (line 44 1040), that is the tax student pays.

2

So it’s higher than your “without” marginal rate because the child’s 8615 income straddles the 15% and 25% brackets?

3

Yes, I thought our highest marginal rate was 15%, but with the child income added it is more than 15%.

This is also before any tax credits are in play, because our effective tax rate on our return is much lower.