My daughter graduated college in May of 23 and begain a graduate program on the other side of the country in September. The school covers her tuition and health insurance plus she is being paid approx $4000/mo as a graduate stipend, which is being reported as taxable scholarship on a 1098-T and thus counts as unearned income. This year I assume we need to claim her as a dependent since she was in college (which counts as living with us) and was on our insurance - she lived with us over the summer and we also helped pay for her move out there so we definitely provided more than half her support. But I think that her standard deduction wipes out most of her taxable scholarship unearned income for this year so I'm not too worried about this year.
But in 2024 she will definitely not be our dependent. She is completely supporting herself 3000 miles away on this stipend and her health insurance is being provided by the school so she is no longer on our plan. At the request of the school, she has changed her address/drivers license/voter registration so that she will qualify as an instate resident for her program as of next year. She does have a 529 plan which she is both owner and beneficiary and she is taking some qualified room & board withdrawals from that to supplement as she is in a very HCOL area but again, I believe that counts as her own support since she is the account owner. Her school forbids her from having any other job besides the research she does for them so she can't make any "earned income" via a summer job or side gig or anything....her entire source of support is going to be this ~48000 "unearned" stipend (which she actually does need to earn by doing lab research outside of her classes) plus whatever money she takes out of the 529.
My understanding is that because she will only be 23 at the end of 2024, she is still subject to kiddie tax. We are likely to be just barely in the 32% bracket next year, and if I understand kiddie tax correctly, that means that she has to pay tax on her entire income at our highest rate, 32%. This means instead of paying tax at her low rate, she will lose basically a full third of her $48K to tax even though she is 3000 miles away from us and no longer our dependent. I don't see how this can possibly be correct. It certainly doesn't leave her enough to live on in the Bay Area of CA, especially when factoring in California state tax as well. So it likely means we'll have to write the check for her tax bill -- she's been saving some money for taxes but there's no way she can save 40% (including state tax) and still eat. So much for her supporting herself.
I understand the intent of the kiddie tax was to keep parents from sheltering assets in the kids name, but this certainly isn't that situation. Is there anything we can do to keep her from falling under kiddie tax next year other than us dying or her getting married (the 2 options I found on the internet LOL). The school won't change how they are reporting it and she can't get another job to have earned income without violating the rules of the program and risking dismissal if she's caught (and again, because she's basically required to work in the lab whenever she's not in class, she wouldn't really have time for another job anyway, which is I'm sure why the school forbids it). I did see something on the internet about claiming that because she does have to work in the lab for her stipend, there is an argument that it is actually earned income but I'm not sure that flies since it isn't reported on a W2 -- it's clearly only on the 1098-T in the scholarship box. I appreciate any suggestions!
