Help! Full-ride scholarship dual US/UK citizen child living + working in both countries over 2020. Where do we start?

[EmilyUK]

Thanks in advance for any guidance.  Utterly perplexed this year.

Background

Me: US citizen, lived in UK since 90s, all income -circa $24k/year- generated in the UK.  Pay UK taxes and national insurance and file 'single' on IRS 1040.  No investments, no complicated tax issues.  One child only, below.

Daughter: 18 yo.  Grew up in London UK, also dual US citizen.  Got full ride scholarship to American university she started in September.  Taxable part of her scholarship (ie room, board, travel) circa $12.5k/semester.  Additional income category -  given circa $2k/semester for university required health insurance, required as she can't take her UK national health insurance with her to the US.  University's website suggests the health insurance addition to her scholarship is taxable, whereas another similar university's guidance describes it as non-taxable as it is a requirement of registration at the university --- as it is at hers.  

Additionally: Since April daughter has been providing online tutoring with UK student which, in 2020, generated an income of circa $5.5k, of which circa $800 happened remotely while living on campus in the US.  

Daughter lived on US soil, on campus, Sept through Thanksgiving. Returned to the UK.  Will complete spring semester remotely, staying in the UK, and hopes to return in-person stateside in Sept 2021.  She continues tutoring her UK student and will now also will do a US 'campus' job 10hrs/wk, but remotely from the UK.  

UK has a different tax year to US, running 01 April - 31 March so daughter will not declare her 2020 UK earnings here, and have paperwork for it, until later in 2021/start 2022.

🤗Any guidance on how to start with this one would be most appreciated!  🤗

I seem to understand that as I can declare her as a dependent, she is not allowed to, though I can also choose not to but she still can't even if I make that choice.  I don't understand the implications of all this.

I also seem to understand that AOTC may not apply in our case because of her taxable scholarship, other than perhaps for her books purchases over fall semester - though perhaps I'm wrong there. So my key q's:

1. What are the implications of declaring her versus not declaring her?
2. Who must declare, or is better off declaring, her taxable scholarship income?
3. Who must declare, or is better off declaring, her earnings from work?
4. Who does she owe taxes to for earnings made remotely, ie the online tutoring she did of a UK pupil while based in the US in the fall, or the 'campus' work she's starting now on UK soil for her US university?
5. Finally, what about the taxability of her required health insurance, covered by her university?

Thanks so much for your help!

[AmyC]

1. Dependent or not, is best determined by using the IRS website which will ask you all the relevant questions and get you the correct answer. See Whom May I Claim as a Dependent? Whomever claims the daughter, claims the education credit.

2 & 3. Your daughter must declare her taxable income, scholarship and work. The scholarship income can get tricky for how to claim box 5 expenses vs box 1. I am including that information below.*

4. See IRS Can I Exclude Income Earned in a Foreign Country? Money taxed by another country, can qualify for a tax credit on the US return.  Am I Eligible to Claim the Foreign Tax Credit? US based income  would be reported on the US return.

5. See Am I Eligible to Claim an Education Credit? by the IRS.  See What are examples of education expenses?

This information will get you started and you can reply for more help as needed.

*1098T discussion continued

What you do depends on the numbers.

Example 1: Box 1 is bigger than box 5.  Your expenses were greater than your grants. Parents take the 1098T and the education credit, if eligible. The difference between box 1 and box 5 would be the education expenses.

Example 2: Box 1 is bigger than box 5.  Your expenses were greater than your grants. Parents take ALL of the education expenses(box 1) and student includes box 5 in her income. This only works if your parents can claim the education credit. The credit to them is usually more than the little or no tax to student. Nobody uses the 1098T itself, just the information split between you.

Example 3: Come up with some combination of the first two that gives one of both of you the most advantage.

Example 4: Box 5 bigger than box 1. Student take the 1098T onto her return. She will have income of the difference. Nobody gets a tax credit.

[EmilyUK]

Thank you so much for replying to this!  I've been sitting on a reply until I had time to think through your offering. 

So I understand, you're saying that, despite my 18yo being a dependent because she doesn't provide more than 50% of her financial support, she rather that I claims the taxable part of her scholarship (scholarship left over after tuition, fees books), which falls into the 'unearned income' category? 

We will not be due any kind of education credits as far as I understand because 100% of her expenses incl travel, room and board, are covered by scholarship, which seems right.

I do understand she needs to file for the tutoring income she made in 2020. 

And I understand from my experience of previous years that my low income, all from here in the UK ($23k/year), is all untaxed because I earned it and pay tax on it here in England (Foreign Earned Income Exclusion).  

As I don't understand the tax system well, I just want to make sure, with things like the kiddie tax, that my daughter and I do our taxes right, and there may be a difference if she or I declare that unearned income?? 

2020 was her first semester, so her taxable scholarship was circa $12.5.  But in 2021 and onward, that will be more like $25/26k for the full year of two semesters. 

I am learning this can garner a sizable tax bill so we need to be sensible and plan wisely.  I am fine to support her to pay this if owed but it comes as a surprise if indeed it is a cost of a full-ride scholarship.  (I'm not complaining - so blessed for her scholarship!)

Thanks for your elucidation.

Warm wishes, 

Emily 

[AmyC]

The scholarship income will go on your daughter's tax return. The excess above education expenses is scholarship income taxed as wages. It will go on the wages line for your daughter. It does not qualify for the kiddie tax and your return.

You are correct, a blessing, the amount is so high, neither of you will get education credits.

Her 2021 scholarship will be larger than your income, You get the Foreign Income Exclusion but she won't.

You are most welcome, best wishes to you both!

[EmilyUK]

@AmyC AmyC, you are amazing.  Thank you!  

Her school has confirmed she will not get a 1098-T because (cut and pasted from email with them): " A 1098t form was not generated for your daughter because the amount she received in in Financial Aid exceeded the cost of her qualified tuition and fees. So basically her financial aid paid for her qualified tuition and fees. "

I have read in places around the internet that the taxable part of her scholarship qualifies as 'unearned income' but you say it goes in the 'wages' section.  If this is correct, presumably she won't get a form W-2 from her school as I reckon we would have had that already; we just put the taxable portion of her scholarship it in that section anyway? Do we explain somehow where those 'wages' came from?

I finally feel I'm getting to the crux of this issue - it's plagued me (and led to hours and hours of not entirely helpful reading around the internet).  So thank you so much again!!

[AmyC]

The scholarship income is listed as SCH to show that it is indeed Scholarship income on the tax return. The SCH is listed next to the wages and the scholarship is moved by the program to the correct wages line. 

The income is not entered in the wages section. It has to be entered as scholarship income to get the correct treatment.

See these articles by TurboTax:

• Where do I enter a scholarship, fellowship, grant, or other financial aid I received?
• Are my scholarships, fellowships, or grants taxable?

As long as the income says SCH, it can be listed elsewhere, such as other income since you don't have the 1098T. I found this article that may also help See Where do I enter scholarship income?

You've got this!

[EmilyUK]

@AmyC  Again, you're amazing.  I really can't thank you enough!!