In order to get more AOTC, if I include $2000 grant/scholarship as taxable income, Is this income earned income or unearned income? more specifically, will the student have to file tax return if students total income is $3500 work study + this $3000?

[xu3]

why I am asking this question is, if it is earned income, and the student is not required to file tax return, then his income is not considered in caculation of premium tax credit of health insurance by marketplace. if it is unearned income, the student's income is included in household income, then the extra AOTC may not be worth that decrease of PTC.

[Hal_Al · Accepted solution]

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement ($14,600 for 2024) and the dependent standard deduction calculation (earned income + $400 ($450 for 2024)).  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.

Entering taxable scholarship income, in the income section of TurboTax (TT) , will report the income as unearned income on line 8z of Schedule TT can handle the dual treatment of the income.

Q. Will the student have to file tax return if students total income is $3500 work study + this $3000?

A. No, if the work study is reported as earned income too.  He's under the filing threshold.  

A dependent  must file a tax return for 2024 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $14,600 ($13,850 for2023).
2.          Unearned income (interest, dividends, capital gains, unemployment, taxable portion of 529 distribution) of more than $1300 ($1250 for 2023). 
3.          Unearned income over $450 and gross income of more than $1300.
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2600 ($4,600 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.

[xu3]

Thanks!

I have a quesiton. The $3k is earned income for purpose of filing and standard deduction, but is unearned income for kiddie ta, ,then 3k unearned income will make my son to pay kiddie tax. If my son does not file a tax return, how can he pay kiddie tax,  or he is required to file tax return if he owes kiddie tax?

[Hal_Al]

Q.   If my son does not file a tax return, how can he pay kiddie tax  or he is required to file tax return if he owes kiddie tax?

A. He does not owe kiddie tax because the standard deduction wipes out all taxable income.  It's a quirk of the hybrid status  of taxable scholarship.  If he had ended up with  taxable income, he would have to go thru the extra step of calculating the kiddie tax (form 8615).