My full-time undergrad son worked last summer at a Federal agency doing research and received $6k in payments (which he used to pay rent as research was in another state) which was reported on a 1099-G as ‘taxable grant’. From what I’ve read, this is considered taxable since it was not used to pay tuition (it was for the summer when he did not take any classes). I entered it as such in the tax software for his tax return (as a single filer that can be claimed on someone else’s return). It is not including that amount when calculating his standard deduction ( I thought that was considered part of his ‘earned income’ for his standard deduction) so the tax liability is much larger than I expected. Also, it is saying that we owe a large kiddie tax because of it (his only other ‘unearned’ income was $1,070 in interest for savings bonds cashed in).
Can that summer grant be considered part of his school year even though it was for the summer and the research was not performed at the school (if I add the summer grant amount to the scholarship he gets from his school, the two amounts are still less than the amount of tuition & books for the year)? I don’t know if it matters, but the research position was arranged by his school and the summer rent was actually added to his Fall tuition, room & board bill.
Hopefully someone with actual expert knowledge will jump in and answer your question. Our son’s taxes have been complicated due to research and scholarships. The standardard deduction applies to determine whether or not they have to file. If the amt exceeds their standard deduction, then it moves to exceeding the $2100 in unearned income amt.
I don’t know if you can use research money toward tuition deductions or not. My son can’t bc he has scholarship money that covers his tuition. But, yes, the amt can be significant.
Taxable grants that are not reported on a W-2 (for instance, reported on a 1099-G as in you son’s case) are treated as unearned income for the kiddie tax and therefore must be reported on IRS form 8615.
But that grant amount also doesn’t count towards his standard deduction? It seems absolutely crazy that he owes $1200 in taxes on $8k total income (summer grant, small campus job & $1070 interest income). Also thought kiddie tax was assessed to prevent moving money around to avoid paying taxes- why would a taxable grant be part of this?
they’re two different things, the kiddie tax and income tax. The $6000 summer grant (my daughter had one of those summer '16) + 1070 already puts you over the standard deduction, so kiddie tax rules kick in. You follow the instructions on Form 8615. Yes, $1200 seems like a lot, but that’s based on your top tax bracket, not his. Taxable grants, like this research grant became subject to the kiddie tax just a few years ago. Not really sure why. On the bright side, in spite of the 6K being money he had to work for (research is work), he didn’t have to pay SS on it.
I’m not sure what you mean by this. If you claim him as a dependent on your tax return, his standard deduction will be the greater of either 1) $1,050; or 2) his earned income plus $350, but generally not more than $6,350. For determining the standard deduction in this case, a taxable grant does count as earned income. So with the $6,000 grant and interest income of $1,070, he should be maxing out his standard deduction at $6,350. Let’s say he made $800 at his small campus job; he would have an AGI of $7,870 and after the full standard deduction he would have taxable income of $1,520 ($6,000 + $800 + $1,070 = $7,870 AGI; $7,870 - $6,350 = $1,520 taxable income).
Edited to add: ordinarylives is exactly right; you need to follow the instructions for form 8615, which will calculate a tax amount several different ways and instruct that the higher of the calculated amounts be used on the tax return. In many cases the higher tax amount will be based on a higher marginal rate that applies to the parent’s return.
BelknapPoint: That’s not how the software is treating it: his standard deduction is only the amount of his campus job + $350. The Line 43 taxable income is $7k+.
Thanks for your help.
Unfortunately, with the kiddie tax applying, it may not make any difference. In a nutshell, here’s how the kiddie tax works: there’s a deduction for the first $1,050 of income (not taxed); any earned income (using the kiddie tax definition) above $1,050 is taxed at the child’s rate; any unearned income (includes the taxable grant) between $1,050 and $2,100 is taxed at the child’s rate; any unearned income above $2,100 is taxed at the parent’s highest marginal rate.
I found this in 1099G instructions.
It says it is not supposed to be used to report scholarships and fellowship grants.
Maybe he could send this info to the employer and see if they can issue a 1099misc and then he might be able to report it as a taxable research stipend or self employment income which might be more tax favorable.
Also what kind of savings bonds did he cash in? Isn’t there some kind of exclusion for the interest if it was used for education expenses like tuition for certain savings bonds (series EE and I)?
Savings bonds were issued 20 years ago jointly in his name and my name. From what I read, they would had to have been issued in his name only (even though he cashed them in). Did not know that 20+ years ago. Thanks for trying to help though!
But if you and he were co-owners on the savings bond, and this bond was purchased by you when he was a baby, then why couldn’t you report the interest on your tax return?