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Level 2
June 3, 2019
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21 year old stressed over taxes on scholarships. How do I proceed?

  • June 3, 2019
  • 28 replies
  • 40 views

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.

    Best answer by Opus 17

    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.

    28 replies

    Level 15
    June 3, 2019
    "About" $5000.  
    Level 13
    June 3, 2019
    Opus, I think you originally meant "because the scholarship exceeded *THE STANDARD DEDUCTION* by around $5000", rather than "qualified expenses" (tuition).  I missed that you just phrased it awkwardly, but now see you meant the "Standard Deduction".
    Level 2
    June 3, 2019
    I am class of 2019. So in 2017, I had been in college for 1 and a half years since technically I began in August of 2015. My parents did not claim me as a dependent, 100%. To be quite frank with you, my father and I do not have a relationship and my mother is struggling to get back on her feet. Question for Carl and everyone, why am I eligible for a $6350 deduction. Where is that coming from? Do I need to check the box stating that "I can be claimed as a dependent" to receive that deduction? If not, what is the benefit of me checking it?
    Level 2
    June 3, 2019
    Another question for everyone, we are talking about late fees and penalties, how much am I potentially looking at total? $1000s?
    Level 13
    June 3, 2019
    It is likely you with owe NOTHING, or very little for your Federal tax.  However, it may be tricky to enter into TurboTax.

    $6350 is the Standard Deduction (in most cases), so pretty much everybody gets that deduction.  So of your $11,995 of taxable scholarships, that $6350 reduces that to $5645.  But I'm going to change that a little later ...   🙂

    You are subject to the "Kiddie Tax", which taxes your scholarships at your parents' tax rate.  So in most cases, that puts you in a higher tax bracket.  As for what your parent's tax bracket is, that depends in if they are married (and if they are, did they file a Joint tax return or Separate tax returns) and who you lived with.  If you want a closer estimate, please answer that, and give their ROUGH amount of income.


    Assuming you meet the qualifications of the American Opportunity Credit, you will want to INTENTIONALLY make $2000 MORE of your scholarship taxable (possible more than $2000, depending on the results and your parents' tax bracket).  Yes, that will increase your tax.  But it also will qualify you for the non-refundable portion of the American Opportunity Credit, which will greatly reduce or eliminate your tax.  So it is very likely you will owe no FEDERAL tax at all.  Because you live in Texas (and assuming your parents do too), you won't have any State income tax to deal with either.
    Level 2
    June 3, 2019
    @TaxGuyBill if the process involves contacting my parents to do any portion of work, that is out of the question. I am unsure of what my father makes and I will most likely not be able to find out. I also do not understand how I could make $2000 more of my scholarship taxable. Sorry for the misunderstanding; engineering major haha!
    Level 13
    June 3, 2019
    Are your parents married?  Do you have any GUESS for roughly how much income they had?

    Your last comment about your parents seems to imply that you may have absolutely PERMANENTLY moved out of their home.  Does that seem correct for 2017 (the year in question)?  If so, they can NOT claim you as a dependent, which reduces your 2017 taxes even more.

    As for how to make $2000 more of your scholarship taxable, that is just some manipulating of the numbers on the tax return (a legal 'loophole').
    Level 2
    June 3, 2019
    No, they are divorced. My father will not tell me what he makes because we are not speaking. I do stay with my mother over winter and summer break but she did not pay for any of food, living, or expenses while in school (2017). Could this potentially mean that they could not claim me? If you read @Carl11_2 comment up top though, since I used my refund to support myself, I believe that means that can claim me as a dependent since I did not have any other source of income.
    Level 2
    June 3, 2019
    Level 13
    June 3, 2019
    Okay, they are divorced and you live with your mother.  That means your mother can claim you as a dependent (the scholarship does not count as you paying for yourself).  That means the "Kiddie Tax" is based on your mother's income and tax bracket (which sounds like it may not be particularly high).  If you can not get your exact mother's income on her 2017 tax return, you can enter an estimate (perhaps estimate a little high).

    Unless your mother has very high income (which sounds like is not the case), you won't owe any tax (assuming you 'force' the extra $2000 of scholarships to be taxable, so you qualify for the American Opportunity Credit).

    The program will ask for your mother's income to determine your tax, but as I said before, if you can't get an exact amount, give an estimate.  As for the 'forcing' of the extra $2000 of scholarships to be taxable, perhaps @Hal_Al  could guide you with that.  Otherwise, you could go to a tax professional.

    But again, assuming your mother does not have very high income and that you will qualify for the American Opportunity Credit, you will not owe any tax.


    The rules for "Kiddie Tax" changed for 2018, so if you have a similar situation for 2018, you will NOT need any information from either one of your parents for 2018.