If I claim qualified higher education expenses for my child (for college) are they penalized on their state income tax?

[Crimson]

I thought I read somewhere that the dependent/student will get taxed on their state tax for the taxable portion of the higher education expenses. Thank you for your assistance.

[DanielV01 · Accepted solution]

It depends on the state and the amount of taxable scholarship being claimed.  Although a form of unearned wages, taxable scholarship is treated as wages for tax purposes and increase income.  The Federal Standard deduction increased to 12000, so many dependent students are able to take advantage and claim a greater amount of taxable scholarship and not see an increase in tax on their personal return.  However, that increase in income can create greater state income, which can raise state income tax on the dependent.  Still the benefits to you will be much greater than the amount your dependent student might have to pay on his/her state return, so I would not recommend letting that deter you into having your child claim the extra income to allow you to claim the credit.  (And nothing prevents you from using some of your extra refund to cover what he might have to pay back on the state return).