NMF Scholarship and taxes

allyphoe
Wed, 26 Feb 2014 18:08:19 +0000

Neither Pubs nor Forms instructions are authoritative. I suspect that the change in 8615 instructions is more consistent with the IRS’ current interpretation, and “I ignored the forms instructions because they gave me a bad tax answer” is not as good of a taxpayer position as “I ignored the forms instructions because I believe they contradict the plain language of the statute.” (I personally do not believe that the forms instructions conflict in any way with the plain language of the statute.)

The relevant Code Section (which is authoritative) is 911(d)(2).
911(d)(2)Earned income.—
911(d)(2)(A)In general.—The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.
911(d)(2)(B)Taxpayer engaged in trade or business.—In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income.

Note in both subsections the emphasis on “compensation for personal services actually rendered,” and that both regular W-2 wages and self-employment income may not be considered earned income for Kiddie Tax purposes under a facts and circumstances test.