Full ride scholarship help

[great_waffle]

I am an undergrad student at a state university. I have a full ride merit scholarship, which I use to pay for basically everything (tuition & books, housing, food, car, etc.). I also worked a job over the summer that netted about $6000.

On TurboTax I did not check the box "I can be qualified as a dependent" because my parents believe hey cannot claim me, since they did not provide over half of my support (they provided very little since the scholarship covered most everything). I also said that I did not provide over half of my own support with earned income, since the scholarship was reported on a 1098-T and not a W-2. However, despite not being claimed as a dependent or (I believe) eligible to be claimed as a dependent, I still have to fill out form 8615 for the "Kiddie Tax", which I believe will have me paying significantly more taxes since my parents are in a higher tax bracket.

Am I doing something wrong here, or is that just the way that it goes? This whole thing has me a bit confused. Thanks.

[Hal_Al · Accepted solution]

Q.  Am I doing something wrong here?

A Yes, one thing.  Your parents can claim you as a dependent. The full ride does not negate that. See explanation below the line.

Q. Or is that just the way that it goes? 

A. Yes. Actually TurboTax (TT) is doing it correctly. The kiddie tax is not tied to being a dependent. It applies to all full time, unmarried students, under age 24, unless they're an orphan. 

Taxable scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

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There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test. The support test is different for each type. The support test, for a QC, is only that the child didn't provide more than half his own support. The support test for a Qualifying Relative is that the taxpayer provided more than half the relative's support.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. He lived with the parent (including temporary absences such as away at school) for more than half the year