Most big scholarships are from the schools themselves. Pretty sure they know if the amounts exceed tuition.
And certainly any private entity providing a scholarship can make it applicable to tuition only if they so choose. If they don’t it’s reasonable to assume that they are OK with it being used for room and board or whatever.
One year this hit us particularly hard. We discovered that when they bill you and when they give you the award can really affect your taxes. My D has a co-op. I’m not sure of the exact years but this is what happened
Year X she get’s billed for her spring of year Y’s classes the charges for tuition and fees are on year X’s 1098
Year Y she receives scholarship and grant awards for spring and fall of year Y. They go on year Y’s 1098.
Year Z spring semester she is on her co-op term so there is no bill
Her 1098 for year Y shows awards for the entire year but only expenses for the fall semester. Because they were also covering some room and board for both semesters she had income of around $20,000 and a tax bill of around $2200.
We were surprised and once we understood what was happening it made sense. Luckily the co-op paid well and she was able to pay the bill but to those who do co-op you might plan for that.
Not sure how someone could be offended that another person is paying taxes for being successful, but that stands for thinking (or maybe more accurately, feeling) nowadays.
Just to clarify, I think when people say that the student/adult-child pays tax athe “parents’ rate” they mean to say that the taxes owed are at the parents’ highest marginal tax rate.
On a positive note, your child can think about her 1040 and being a responsible taxpayer while those around her blather on about “free college.”
In grad schools (at least with my S applying to grad school) the scholarships have generally been for tuition, but then some schools offer stipends for living expenses as well (that may or may not be tied to teaching), and it is those stipends I suspect that will be taxed. As to why it is at the parent’s marginal rate, my guess would be that any grants for living expenses are assumed to be less money than the parent would already pay so even though the kid is filing their own tax return, they treat that grant in a sense as income to the parents ie less money the parent has to give the kid in living expenses (and I claim no expertise, that is simply a guess). May be going through this with my S depending which program he ends up with.
https://www.irs.gov/publications/p929/ar02.html
Some of the information in posts above is incorrect. Please read relevant IRS web pages, including the one I’ve linked.
D earned some competitive outside scholarships that could be used for any college expenses at any point. They were all paid directly to the school the first semester of the 2016/2017 school year. She planned to use some of those funds to pay second semester school bills. The school only bills by the semester so the funds in excess of first semester bills were refunded to D and she used them to pay her second semester school bills when they were due in January 2017. Because the scholarships were awarded in the 2016 tax year she had to pay taxes on all of them in that tax year. In hindsight it would have been better to ask the organizations awarding the scholarships to defer half of the award until the second semester to avoid having to pay so much tax.
She had scholarships in excess of COA for the semester because of the way they were paid out, 100% of the scholarship money is still going to cost of attendance, it’s just not all being spent on the first semester.
Lesson learned for second kid! Good to know DH is mistaken and one kid’s scholarships won’t impact the other’s tax rate.
Scholarships that cover tuition, qualified fees, and books are tax-free.
Scholarships that pay for room and board and other expenses other than T,F,books, are taxable.
If the student can be claimed as a dependent on parent tax return, they will get a standard deduction of $6,300.
For the purpose of determining standard deduction and requirement to file a return, taxable scholarships are considered earned income.
For the figuring of kiddie tax, they are considered unearned income.
The kiddie tax is figured on form 8615.
The taxable scholarship income of child minus standard deduction is not simply multiplied by parent tax rate to figure the tax.
Rather the net unearned income of child is added to taxable income of parents from their tax return, then a new tax amount is figured from the tax table and the difference of the parent tax amounts (before adding child net unearned income, and after) is calculated, that is the tax the kid pays. It was roughly our tax rate.
If you look on form 8615, it does ask about siblings and their unearned income. We haven’t run into this yet.
From what I can gather on line 7 it asks for total net unearned income from other children’s 8615 form line 5.
That line 7 total gets added to parent taxable income and then a new tax calculated. Difference to original tax amount is kiddie tax. But if there are more than one child they pay their own kiddie tax based on a ratio of their own net unearned income divided by total unearned income of all children.
My D’s school divided all scholarships up between two semesters.
My D pays the tax, but we pay her back because she saves us money with her scholarship.
https://www.irs.gov/uac/about-form-8615
^form 8615
Net unearned income of all children will be added to parent taxable income, and kiddie tax determined on difference between “old” and “new” parent tax. Then each kid pays their kiddie tax based on ratio of their net unearned income to total net earned income.
That’s what I got out of the kiddie tax form 8615
Kiddie tax is fairly new, it was supposed to keep parents from putting investments in children’s name to get better tax rate.
@mommdc Thank you for the very clear explanation! I guess DH was right after all. Knowing this will help us be better prepared when we have two in school.
Yes @Jpgranier the scholarship that exceeds QEE is taxed at parents’ rate. This is mostly an issue for kids with full COA scholarships. The amount spent on things outside QEE, mostly room and board, are taxable as income. You pay the unearned income rate (which I hate also) at parents rate (also stinks since the $$ my D received never touched any of our (the parents) accounts). But it is what it is and she was still able to sock away overage money since we helped her with taxes and some living expenses. A tax preparing, twisted nightmare to understand, but in the end we are better off for having the full ride so it’s all good.
This gets discussed every year. There are some smart tax people on CC. Look at last year threads and see who they are.
He was right that when you have more than one child with net unearned income, it could push the parent into a higher tax bracket. But I don’t think it always results in a higher tax for each child. It probably depends what the parent tax bracket is and how high the net unearned income.
I would do some estimates based on whole year tuition, fee, book expenses and scholarships for one or two kids and run them through the form 8615.
@scubasue , it did change from earned income (of the student) to unearned income a few years ago, so you may have been under the old system. The kiddie tax rules kicked in, I believe, in 2015?
@MaryGJ , we are calling it the kiddie tax because that’s what the IRS calls it. As you put it, the ‘child’ is an adult and therefore she should pay for the taxes - at her own ‘adult’ rate! The IRS says the dependent ‘child’ (and almost all of our college aged students are still dependent for tax purposes) must pay taxes on unearned income (room and board scholarships) at the parent’s rate. How is that fair? The student who gets a full ride but is from a wealthy family may pay taxes on the $15k of room and board at 28% or 33%, while the poor student will pay only 10% on that same $15k. Would we think it fair if they both earned $15k working at Starbucks that they be taxed at different rates? It isn’t the same as a parent having the child ‘earn’ the money to avoid taxes which is what the kiddie tax was designed to do. No one is getting rich on excess scholarships, but there is no free lunch according to the IRS, and students are taxed on their free meals. And beds.
I apologize if the student’s unearned income is added to the parent’s income to raise the parent’s rate, but I think that if it does, it is only for the purposes of the child’s return - the rate on the parent’s return doesn’t actually change. I did my taxes first (Turbo tax), and then on daughter’s (TaxAct) program it asked me to fill in my income and tax numbers, and calculated hers for her kiddie tax form (and spit that out). I don’t see how it would even know if another child also had taxable scholarships as unearned income. The program doesn’t ask about siblings’ unearned income.
My control group is small, but I know I did my taxes first, then hers, then her sister’s, and Daughter #1’s unearned income didn’t change my income or rate, nor her sister’s.
Doesn’t who is “adult” depends on for what? For voting, it’s age 19 and over, for drinking 21. To escape kiddie tax it’s 26 unless they are supporting themselves. I don’t understand the outrage. If they are your dependent, they are still kids, aren’t they? And their income is taxed at parents’ marginal rate. Don’t they allow dependents’ personal exemption on parents’ return in most cases? If so and if you are taking deduction for having dependents, isn’t it reasonable to pay tax on dependents’ income at parents’ rate?
I don’t understand the claim that kids’ income is added to parents’ income. That was not the case when I filed our tax. Their income was taxed at flat rate at our marginal tax rate but it didn’t push our income up or tax bracket. My kid filed her own tax return instead of piggybacking on our return. This year since she supported herself more than half, she is off kiddie tax and her tax was minimal. Nice.
Please read through the 8615 form and you will see it asks about parent taxable income and then figures the tax by looking up the tax in the tax table. The difference in tax is the kiddie tax amount. It also asks for line 5 of all other children.
Yes, and the net unearned income of the child is only added to parent taxable income as part of the kiddie tax calculation on form 8615. The parent income on their return and their tax and tax rate on their return doesn’t change.
Another quirk. If student pays more than 50% of their support, it has to be with earned income.
Scholarships cannot be counted towards support.
@mommdc it’s the whole line 5 issue that I’m concerned with.
DD is very fortunate to have outside scholarships to cover room and board and school scholarships to cover tuition and books. This is not just “free money” that she can do anything with, this is scholarship money and must be used for school expenses (including room and board, I’ll note that one scholarship is explicitly for partial R&B and cannot be used for anything else, one scholarship can only be used toward QEE and another is a tuition waiver that can only be used on tuition so some schools and organizations can and do put restrictions on scholarships and other do not), she can not opt to hold on to X% to pay taxes with. She needs to get a job to pay her taxes or we need to pay them for her which we are happy to do but ultimately they are her not our taxes.
DS is looking at applying for a very generous, very competitive scholarship that includes:
Full tuition and fees
$1,400 monthly stipends, year-round (regardless of summer school attendance)
$1,000 yearly textbook stipend
$12,000 fund for scholar-designed study abroad
$3,000 fund for individualized professional development
Travel expenses for cohort trips to various out of state destinations
Tickets to the Symphony, Opera, Ballet and others events
Travel home twice yearly
That is a boatload of non QEE-expenses! and one of the conditions of the scholarships is that he is not allowed to hold outside employment but he could put some of his monthly stipend aside to help with taxes.
My concern is that if he gets this amazing scholarship it will penalize his sister by increasing her tax rate significantly. She won’t have any of the added benefit of his scholarship but will still be responsible for paying at the additional tax rate.
He’ll very likely have the option another scholarship that is just shy of a full ride, very similar to what his sister currently has. Because of “line 5” this could also increase their tax rates but at least they’d be paying about the the same rate for about the same benefit.
There are several responsibilities with this very, very competitive scholarship and I really want to him understand all the ramifications before he puts in the effort into the application process. Maybe all the bells and whistles of above tuition, fees, room and board aren’t worth the additional taxes and responsibilities? These are certainly not expenses either he nor we would pay for otherwise. I think I’m going to have to contact the school and ask what the average annual non-QEE benefits of this scholarship will be and run the numbers.
I realize this is counting chicken before they hatch as this is a highly competitive scholarship but I want DS to know that if he does go for this and manages to earn it, that it’s not really all “free money”
Taxes may be a “first word problem” but it’s currently my first world problem. It’s my responsibility as a parent to encourage my children to make sound financial decisions, this includes looking for schools that offer generous merit awards and for outside scholarships that they may qualify for, as well as understanding their tax responsibilities.
It’s clear by the variety of responses on this thread that not everyone has the same understanding of the current tax code as it relates to scholarships, especially with siblings.
@mommdc Thanks again for your help!
It’s not an open question, though ppl are confused. The kid pays on her return using parent rate. If theoretically adding kid income to parent income pushes parent into the next highest bracket, then the kid uses the higher rate. The parent doesn’t put it in their return tho, and the parent rate stays as is on their return. The impact of that theoretical “add-in” of the child income is only for the child’s return.
The tax code is full of complexity, theorical calculations and unfairness. It is what it is.
Think of it this way: kid earned 2 things…a tuition, fee and book discount to zero and an amount of $ to pay room & board. The discount, like any discount or coupon is not taxable. The $ to pay for housing and food is taxable, like it is for anyone else. (It’s just the rules).
As for the kiddie tax…it is more to deter rich ppl from doing investing in kids acts. Obviously this was not meant to be caught, but it is unless and until the law changes.
@HRSMom that’s a good explanation and I get that. I’ll admit (and as you can see from posting history on the subject) it’s taking me some time to wrap head around the 'kiddie tax" but the whole sibling thing adds another wrinkle.
My original question was about how Kid-2 effects Kid-1’s tax rate for taxes on non-QEE scholarship income. We are looking at a potential scenario where Kid-1 is paying taxes on non-QEE expenses at one rate but then Kid-2 enters the picture and might get a scholarship significantly larger with tons of non QEE benefits for monthly stipends, tons of travel, study abroad, concert tickets… when you add all that in, it then increases Kid-1’s tax rate even though she’s not getting additional scholarship. I agree that the tax code is complex and at times unfair. I’m just trying to fully understand this so that I can explain it to both Kid-1 and Kid-2 and eventually to Kid-3.
Some people are saying that kids each file their taxes individually and their non QEE scholarship have no impact on each other but both @mommdc and my dh have said that siblings’ non QEE scholarships must be added together. Why would the form ask for siblings information to be added together if they have no effect on the other?