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plato11
New Member

Question about graduate stipend and kiddie tax

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! 

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3 Replies
Hal_Al
Level 15

Question about graduate stipend and kiddie tax

You cannot claim her as a dependent because she provides more than half her own support. 

 

She is subject to the kiddie tax because she is a full time unmarried student (and not an orphan), under 24, who does not provide more than half her own support with earned income. 

 

The way around the kiddie tax is to get the stipend classified as earned income. Currently it isn't earned income.*

 

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 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, stipend and fellowship income is earned income ("compensation") for IRA contributions.

plato11
New Member

Question about graduate stipend and kiddie tax

Thank you for that reply. 

 

Other than getting the college to issue a w2 or 1099 in place of the 1098-T (which they have flat out said they will not do, I'm guessing because that would involve payroll/medicare/other employment related tax obligations on their end), is there any other way to get the stipend classified as "earned income"? Is there any truth to the internet article that claimed some athletes were able to treat their athletic scholarships as earned income because the money is predicated on them playing sports and if they stop the sport (due to injury or whatever), they lose the scholarship? My daughter is basically in the same position with the lab research requirement so if that is a possible approach, I feel it is worth exploring. I'm guessing she's basically out of luck because the college does have a whole web page warning students about the kiddie tax so they are aware of it and if there was any way around it, I'm guessing they'd suggest it, but I figured it can't hurt to ask. This just seems awfully unfair to young grad students and not at all what the kiddie tax was designed for. 

Hal_Al
Level 15

Question about graduate stipend and kiddie tax

Q. Is there any other way to get the stipend classified as "earned income"? 

A. Simple answer: No.

 

Because of the "hybrid" treatment of scholarships, the first $13,850 is  effectively treated as earned income and not subject to the kiddie tax, because it doesn't get taxed due to the increased standard deduction.  This will be reflected in Part I of form 8615. 

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