Can anyone confirm this? My 3 kids kids are all two years apart, my oldest D was fortunate to have scholarships in excess of tuition, books and fees but that amount was then subjected to the “Kiddie Tax” and had to be paid at her parental tax rate. My second child will very likely also be offered a scholarship that will be subject to the kiddie tax as well, my husband has told me that their scholarships above books, tuition, and fees will be cumulative meaning that their scholarships will be COMBINED to determine their tax rate.
Has anyone had experience with this? Is this true? It seems very unfair that the kids should be penalized for their sibling’s scholarship in addition to already paying taxes at their parent’s tax rate! Because of the Kiddie Tax DD owed over $16K in taxes for her first semester (including a $38 penalty for not estimating taxes - seriously how could we estimate taxes on scholarships we didn’t know she would earn!) Is there anything we can do to protect her from additional taxes if her brother earns a scholarship above tuition, books and fees?
Are you sure it was $16K in taxes or $16K in taxable income? I suspect that the other “scholarship money” went to room and board and that amount is usually taxable.
I think your husband is wrong. The kiddie tax rate, after the first $2000, is the parents’ rate, Say your (parents) tax rate is 25%. It will be the same rate for Student A and Student B. Their earnings are not added to parents earnings, so the parents’ income doesn’t change, and parents’ tax rate doesn’t change. Student A pays the kiddie tax on her scholarship overage and Student B will pay on his unearned income that same 25% rate.
Only one of my kids has a scholarship overage, but her overage didn’t change my taxes at all, and for her sister I was able to claim the AOTC.
That seems like a lot of tax on just a scholarship. Did she have a lot of earned income too? She’d get a $6350 standard exemption, and the first $2000 in unearned income is taxed at her rate (10%?). Room and board for an entire year shouldn’t be more than $15k, so half is $7500-$6350=$1150 x 10%= $115 in tax on that. Did your daughter have $10k+ in scholarship overage for one semester? If so, it would be $10k - $6350=$3,650. If your rate is 25%, it would be $200 in tax on the first $2000, and then 25% on the remaining $1650 = $200 + $413 = $613.
Did she have a lot of earned income on which she’s paying taxes? I don’t think you get to blame that tax on the taxable scholarship rule. Next year if she’s claiming $15k in overage? That will hurt.
I did quite a bit of reading about this a couple of years ago when we were in the same situation. It’s been awhile, and I easily could have forgotten all the details, but I am pretty sure that the tax code about taxable scholarships is vague and has not been clarified by the courts. If I do remember correctly, your daughter can report those excess scholarships on her tax return and pay the lower tax rate on it.
It’s definitely not earned income.
It was a drag for my daughter (we definitely made her pay those taxes, as she was responsible for paying a significant portion of her tuition and R&B and she was the one who benefited financially from the gift) but she realized she still came out WAY ahead.
Also…she’s not a “kiddie.” She’s an adult…being given a crap-ton of free money to start her life with. Just because she won the genetic lottery of being born with higher than average academic talent.
Oh the humanity. Horrors.
I don’t think you realize how offensive this post could read to some people.
“Tax the Smart Kids” reads as a complaint of some perceived injustice…of your kid being prejudiced against and charged gasp TAX on her free money…that you know…EXCEEDS…her actual need.
Imagine reading this if you had a special needs kid, or if your kid had a brain injury, or some kind of learning issue that pretty much guaranteed they would NEVER receive a scholarship regardless of their effort or the amount of heart and determination they applied. Imagine worrying about your kid’s future independence and what happens when they outlive you.
Your daughter is an adult. Adults pay taxes.
You, nor she, are a victim.
Try expressing gratitude that she's getting a free ride.
Pay the tax. And again, be grateful that you have such a "problem"
And before you say…Oh, but she worked so HARD for that money!
No, she didn’t. Neither did my kid…who was also given a windfall of aid, grants and scholarships.
My kid, like your kid…was born bright. And yes, she worked and tried hard. Like most kids do.
It’s nice when working hard results in almost universal success and good payoffs. Lots of kids work hard and don’t have universal success, and are never given a payoff. Most kids, in fact…never get the advantages our kids got.
Really think about that, and read your post again.
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IRS indicates taxable amount should be reported as regular income on line one of the 1040 EZ. I don’t see how it could be subject to a higher tax rate.
I’'m not sure how someone is allowed to accept scholarships over and above their costs. So if you applied for 1,000 scholarships, were awarded many of them, you could potentially collect large sums of money above your costs? That seems unethical, and one should not accept scholarships above the allotted amount. Shouldn’t that money be going to another scholarship applicant who hasn’t exceeded their tuition and fees? That’s a screwed up system where one kid can collect too much.
They shouldn’t have to pay taxes on it, they should not accept it.
Are y’all positive about being taxed at parent’s rate? I’m receiving a scholarship of 10k the first year and was going to withdraw that money from my college fund to drain it (it was over funded).
Spoke with people from my 529 company and they assured me the 10k would be taxed on my tax rate, not my parents.
@Jpgranier–please speak with your tax advisor about your ed fund. There are steep penalties for taking money out of ed funds for other than allowed ed purposes. The tax advisor can also talk about any taxes you’d owe and how the various types of funds would be taxed.
I thought the scholarship references were to just tuition and fees. I wonder if the people providing scholarships are on board with paying for food and housing…but do they even know?
Not everyone goes away from home and spends big bucks to live on campus. What happens if one gets enough scholarship money that it surpasses all the costs? I wonder if anyone ever turns down the money so they can give it to someone else, if they have enough.
The vast, vast majority of scholarships come from the universities so they know exactly how much is going to tuition and fees and how much is going to other things. Schools are not going to give scholarships above there COA.
I recieved more (a few hundred dollard more) in scholarships and grants my freshmen year due to a hodgepodge of outside scholarships. I used that money to buy school related stuff and to help get me off to school. I don’t feel guilty about getting more than the COA.