As I prepared for my 2018 taxes, I had some thoughts come into my mind and now I am very scared and worried. I live in Texas and attend a well known Division 1 college. In 2017 I did NOT work. I did not earn a single dime from employment. However... I received $13474.00 as a refund from a scholarship I received throughout the year. I have 2 classes I took that my refund did not cover. One class was $300 and the other was $1179. From my understanding, these could have been used as deductions. Anyways.. 2017 was the first year I received a refund. I was unaware that taxes must be paid on scholarships. On top of that, I never once received a letter from the IRS or anyone asking where my taxes were or anything. With that, I am stressing out now. I do not want to be 21 years old and end up owing some outrageous amount of money that I cannot afford. This was the only money I received the entire year of 2017. My question for the community is this...
What do I do? How do I act? Please help because I am freaking out and stressed beyond belief.
Thank you.
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Here is the simple situation.
1. You have taxable income in the amount that your scholarship is more than tuition plus required fees. That seems to be $11,995, although maybe there are some fees you didn't account for. What matters is the tuition you actually paid in 2017, even if it was extra classes that you didn't originally enroll in.
2. This income is considered "unearned income". That's important later.
3. You need to file a 2017 tax return. Assuming you are single with no dependent children, you would file as single and check the box for "someone else can claim me as a dependent.
4. You get a $6350 standard deduction, meaning $5645 is taxable.
5. The "kiddie tax" taxes your unearned income at the same rate as your parent, if they claim or could claim you as a dependent. Normally, this means that parents can't put investments in their children' names to pay lower taxes. But it also impacts you.
6. Based on your mother's income, that $5645 of taxable income might be taxed at 10%, 15%, or 25%. It's not likely to be higher than that unless your mother earns more than around $150,000. 10% or 15% is probably more likely.
7. So that might be $565 or $846 of income tax.
8. The late fees and penalties are roughly 1% per month of the amount you are late, in this case, back dated to April 15, 2018, which was the deadline for filing the 2017 return. So around $100 or less at this point. Turbotax may offer to calculate the penalty. Don't take the offer, since the calculation is almost always a few dollars off and the IRS inevitably sends a bill for the rest. Just pay the tax you owe and let them bill you for the correct penalty. If this is the first time you owed a penalty, you can request a waiver after you get the bill. https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-first-time-penal...
Now, there is a more complicated solution. If you were to report that you paid $2000 in tuition with your own cash, and received a $15K refund instead of a $13K refund, you would show more taxable income and show more income tax owed. But, you would also qualify for the American Opportunity Tax Credit. It won't result in a refund, but it will zero out the tax you owe, meaning you owe no tax and no penalties. Due to the way the credit works and the limitations because of your age and that you live with a parent, there is no point to claiming more than $2000 of tuition paid.
This "trick" is completely legal. However, to use this trick you still have to file a tax return and put it in writing. If you never file, the IRS will probably get around sooner or later to matching up your form 1098-T in their computer and realize you never filed a return, and send a letter and tax bill.
There are a couple other experts who are probably better at explaining this trick than we are, including how to enter it in Turbotax.
Then for 2018, if you also got a refund in excess of tuition and qualified fees, you get to do the same thing all over again.
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