College student with earned and unearned income

[Mrbobwoj]

My 23 YO has $6500 in earned income reported on W2’s with no federal or state taxes withheld.  She also has $8600 in unearned income on a 1099-g specified as a taxable grant.  I am claiming her as a dependent.  I’m baffled on how TT is calculating the tax on this scenario, more specifically for the earned income portion.  I do understand that the unearned portion over $2300 is taxed at my rate which bumps up the tax for her significantly, but how is the earned portion taxed?  Is the total of earned and unearned added together to determine the standard deduction?  I would have thought that earned portion would be tax free since it’s under the standard deduction for single filers.  

[KrisD15]

Her standard deduction as a dependent would be 6,900 (earned plus $400) 

According to the IRS:

"Dependents – If you can be claimed as a dependent by another taxpayer, your standard deduction for 2022 is limited to the greater of: (1) $1,150, or (2) your earned income plus $400 (but the total can't be more than the basic standard deduction for your filing status)."

[Hal_Al]

@Mrbobwoj  said " She also has $8600 in unearned income on a 1099-g specified as a taxable grant. "

What is the source and purpose  of the grant?  If it is essentially a scholarship, it is not fully treated as unearned income. 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 (EIC. IRA contributions or additional child tax credit).

The trick is to get TurboTax(TT) to treat it as earned income for purposes of the standard deduction.  Do not enter the grant at the 1099-G place, in TT. Instead, enter it in the educational expenses and scholarships section.  After entering your 1098-T, you will be asked if you had any scholarships not included on the 1098-T. Enter there.  When asked how much of the grant was used for room and board, enter the 1099-G amount. That makes it taxable (R&B is not a qualified expense). Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B. 

[Mrbobwoj]

Unfortunately its not a scholarship.  She did an internship at the NIH (government) and so this is basically her pay for the work she did.  

[Mrbobwoj]

After reading many community forums and actually doing the 1040A the old-fashioned way, including the worksheets, I found that this grant is considered "earned" income versus TT default of "unearned".   The standard deduction worksheet for dependents actually states this.  The trick to get this into TT was to enter it as you specified, as "other taxable income".  From there, after the income review popped up, I was able to update the total earned income to include this fellowship grant.  This eliminated the need for the 8615 and "kiddie tax", which is intended for unearned income (investments) that a child may receive from a parent.  At the end of the day, she worked 40+ hours per week for the government doing cancer research and was paid accordingly.  Why they just can't issue a W2 is beyond me!