Doesn't Pay to be Smart?

[Tax Prep by Deb]

I need a second set of eyes on this one.  I have a client who is a student at UCLA.  He is very smart and as a result has scholarships that way exceed his tuition.  His scholarships and grant is $36,107

his tuition is $11,754.  So he has taxable scholarships of $24,353.  In addition he has a W2 for 3,219.

 

Because the taxable scholarship isn't counted as support for himself, his parents are still able to claim him, thus causing a form 8615 situation by which they want over 4,000 in taxes.  Am I understanding this correctly?  Did I mess up last year and not figure Kiddy Tax for him based on the scholarship be non earned income?  He was in the same situation last year, however I didn't do the Kiddie Tax Return thinking that non earned income was basically interest dividends, investments ect… I never would have though of scholarships in that classification (he worked hard, in my mind earned it).

What say you?  Am I missing something?

 

[RitaB]

Scholarship income is unearned income for Kiddie Tax purposes.  Yes. 

Now, you taught me something:  I didn't realize the taxable scholarships are NOT counted as support provided by the student. 

Also.  I wonder how many education credits are reported incorrectly.   I hate it when I see a 1098-T.

[Terry D EA]

Below is a different twist in this situation. I would check further into the changes for 2018 to be sure this is filed correctly.

 

Yes, unearned income (including scholarships) is subject to the Kiddie Tax.  For 2018, Kiddie Tax rules change and will be taxed at Trust rates.

However, for some mysterious reason the Standard Deduction treats scholarships as 'earned' income.  In other words, the student will get the $12,000 Standard Deduction, and only the income above that would be subject to Kiddie Tax.

[Lion EA]

Are you working off the bursar's statement that has dates for the amounts? Forms 1098-T are frequently wrong.

[Terry D EA]

Follow Lion EA's guidance. Get the statements from the college. I've had two situations within the last two years of the IRS questioning the amounts on the 8863. I have noticed this year the colleges are now putting amounts in Box 1 of the 1098-T. I have also notice those amounts are not entirely accurate either. I make copies (digital) of everything and put them in the client's file just in case my client's get a letter.

[Tax Prep by Deb]

Yes I have the actual account transactions and they are matching to the 1098-T.  Even with the 12000 standard deduction the taxes are over 4,000.  I guess it is what it is, but honestly the only way I would have ever caught this was Drake flagged it.  I used ATX last year and nothing, but looking over the instructions for the kiddie tax form it has been this way for quite some time.  I will have to look at last years and see if it would make a difference.  I really don't believe so because to be honest with you the kid makes more in scholarships than his parents do working.

[Margaret CPA in OH]

Just curious here - does the student receive all the money from the scholarships that are in excess of the tuition, etc. for which they are meant to cover?  I thought many/most scholarships were paid directly to the school, not to the student, so am wondering about the excess.  I haven't had any of these, just average smart students, I suppose

[Abby Normal]

3 hours ago, Margaret CPA in OH said:

Just curious here - does the student receive all the money from the scholarships that are in excess of the tuition, etc. for which they are meant to cover?  I thought many/most scholarships were paid directly to the school, not to the student, so am wondering about the excess.  I haven't had any of these, just average smart students, I suppose

The scholarship was likely used for room and board.

[BulldogTom]

56 minutes ago, Abby Normal said:

The scholarship was likely used for room and board.

Bingo!

Tom
Modesto, CA

[Tax Prep by Deb]

That is the case.  I actually have two of these situations were the kids do very well in school and have a great amount in scholarships.  Both come from low income families, so even in the past the Kiddie Tax wouldn't be much different between either child or parent, but with the new way it is being taxed it is hitting these kids hard.