I’m trying to help my daughter file her taxes for the first time. She has no earned income. She only has an unearned taxable scholarship to claim. She should have just over $1500 worth of scholarship to pay taxes on after all of her non taxable expenses are factored in. Her school does not send out W-2’s for excess scholarship. As TurboTax instructs, we have put all the information into TurboTax via the 1098-T and answered all the questions but it is not calculating any taxes. It just keeps calculating her taxes and refunds as $0. When I select review it says that the 8615 form is not ready for filing yet. Is that the issue keeping it from calculating?
Taxable scholarships are a "hybrid" income category. They are unearned income for most purposes, including the "kiddie tax". But taxable scholarships are treated as earned income for purposes of a student-dependent's standard deduction. So since her income is less than $12,550, it is wiped out by her standard deduction and there is no tax. TurboTax is doing it correctly.
Her standard deduction is $1568 + 350 = $1918 and will show on line 12a of form 1040. The standard deduction for a dependent is the greater of $1100 or their earned income + $350 (but not more than $12,550). For the purpose of that calculation, taxable scholarship is treated as earned income.
She has to file Form 8615. She has unearned income over the allowed amount.
For tax year 2021, the Kiddie Tax applies if your child has unearned income (usually from investments) exceeding $2,200.
Form 8615 must be filed for any child who meets all of the following conditions.
For these rules, the term “child” includes a legally adopted child and a stepchild. These rules apply whether or not the child is a dependent. These rules don’t apply if neither of the child’s parents was living at the end of the year
Please see this answer by macuser22.
Unearned income defined.
Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, taxable scholarship and fellowship grants not reported on Form W-2, the taxable part of social security and pension payments, and certain distributions from trusts.
Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).
I understand that she needs to file this form. What I’m trying to understand is why Turbotax is not calculating any taxes owed after I enter all of the 1098-T information showing the excess scholarship amount. She should owe taxes via the 8615 but it still keeps saying $0 owed.
Can you clarify if $1500 is the only income your daughter has on her tax return?
Yes. She had $2776 total in unearned taxable scholarship and then she put in the $1208 she paid for books and materials she had to have for classes leaving $1568 she should be taxed on. She has no earned income. I feel like TurboTax has an error because when we tried removing the $1208 for books which would raise it over the $2200 threshold it still was calculating $0 for taxes owed. Something just isn’t adding up.
Taxable scholarships are a "hybrid" income category. They are unearned income for most purposes, including the "kiddie tax". But taxable scholarships are treated as earned income for purposes of a student-dependent's standard deduction. So since her income is less than $12,550, it is wiped out by her standard deduction and there is no tax. TurboTax is doing it correctly.
Her standard deduction is $1568 + 350 = $1918 and will show on line 12a of form 1040. The standard deduction for a dependent is the greater of $1100 or their earned income + $350 (but not more than $12,550). For the purpose of that calculation, taxable scholarship is treated as earned income.
More good news. There is another tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.
Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.
Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.
I thought that was only if she had earned income that was at least half of her total income. I don’t see anything about this on the instructions for 8615.
It's not if her earned income was at least half of her total income, it's if her earned income is more than half her support. But that's not relevant here. That has to do with whether she is eligible for the American Opportunity Tuition Credit (AOTC or AOC).
You never needed form 8615 because her unearned income is less than $2200. Even if her unearned income is more than $2200, form 8615 is not generated if her taxable income is 0. And, that's the case when her unearned income is taxable scholarship, up to $12,550.
Can you please check the comments below because they seem to contradict what you have said here and I feel like I’m getting conflicting advice?
I’m confused and trying to understand because she said we would definitely need to file a 8615 for our situation and you said I don’t. TurboTax is making us add the form to her return so something isn’t adding up. Everything we read says that she needs it and your post is the only one that says we don’t so I’m asking for a second opinion to confirm. It was directed to the first tax expert that said we would definitely need that form.
I also want to be clear that she is filing as someone who can be claimed as a dependent so she cannot take a standard deduction.
Yes, she can take A standard deduction. It's just not automatically the full $12,550. The standard deduction for a dependent is the greater of $1100 or their earned income + $350 (but not more than $12,550). For the purpose of that calculation, taxable scholarship is treated as earned income.
I want to thank you so much for your help and patience. I finally understand everything you were saying above and it makes sense. I wasn’t understanding how the IRS allows scholarships to be considered like earned income for a standard deduction calculation when everything about the kiddie tax talks about a standard deduction of $1100. Now that I understand it is all calculated correctly. Thank you again!
Hi, @Hal_Al
I have a follow up question to this. What if the student has unearned income from interest, in addition to unearned income from a taxable scholarship (not used towards tuition).
For example, if a student has $4K earned income from a job, $2K unearned income from interest, and $6K unearned income from a scholarship, how does the kiddie tax come into play?
On Form 8615, is the unearned income on line 1 supposed to include the interest AND the scholarship? If so, in my example, this would result in unearned income of $8K (instead of just $2K) minus $2300 equaling $5700. Taxable income from the 1040 would be $12K-$10K (because you can deduct the scholarship as earned income here) -$400 = $1600. Since that is lower than $5700, does that mean the $1600 (which is basically the interest less the $400 deduction) is subject to the kiddie tax? If so, that basically means that if a student has a taxable scholarship greater than a pretty minimal amount plus additional unearned income, then the $2300 kiddie tax deduction never really comes into play because other than the first $400, the non-scholarship unearned income will be completely subject to kiddie tax (instead of just the amount over $2300).
The only way I could see this being remedied is if the 8615 line 1 is not supposed to include taxable scholarships. But the instructions don't read that way. It just seems unfair that in my example you would not pay kiddie tax on the $1600 of interest if the interest was your only unearned income, but that you do pay kiddie tax on the $1600 of interest if you have taxable scholarships (even though those scholarships aren't actually taxed as long as below the standard deduction). Thanks for any clarification.
Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400). It is not earned income for the kiddie tax and other purposes (e.g. EIC). For grad students and post grad fellows, scholarship income is earned income ("compensation") for IRA contributions.
Q. On Form 8615, is the unearned income on line 1 supposed to include the interest AND the scholarship?
A. Yes. It's the gross unearned income, before the calculation of taxable income.
Q. Taxable income from the 1040 would be $12K-$10K (because scholarship is earned for calculating the standard deduction). Does that mean the $1600 (which is basically the interest less the $400 deduction) is subject to the kiddie tax?
A. Yes
Q. Does that mean that if a student has a taxable scholarship greater than a pretty minimal amount plus additional unearned income, then the $2300 kiddie tax deduction never really comes into play?
A. No. It just means the calculation is different, since the dependent's taxable income is less than their unearned income after the $2300 deduction. In your example, the kiddie tax is only applied to the $1600, instead of the $5700. Another way to look at it is: you're still getting the full $2300 kiddie tax deduction, it's just shown/applied somewhere else (in the increased standard deduction).
Q. It just seems unfair that in my example you would not pay kiddie tax on the $1600 of interest if the interest was your only unearned income, but that you do pay kiddie tax on the $1600 of interest if you have taxable scholarships (even though those scholarships aren't actually taxed as long as below the standard deduction).
A. Others might argue that it's unfair that your unearned income is treated better than their unearned income. In your example, $8000 of unearned income is taxed as if it's only $1600.