Form 8615 resulted in unanticipated tax on parents' untaxed qualified dividend amount

[Greenfroggies]

I have not been able to find a question or article which addresses the issue I have encountered.  I also spent almost 2 hours with TurboTax Live, and they were not able to address my question.  I don't know if there is an error in TurboTax or if the tax amount is correct but just much higher than I would have thought.  I am hoping someone out there with more in-depth knowledge of the tax code can help.  

My child receives scholarship funding in excess of the tuition amount.  I entered the information for calculating the 8615 form using the pre-TCJA option.  The amount of tax owed for my child's tax return is equal to the taxable income (after the standard deduction) multiplied by my tax rate PLUS an additional amount which I finally realized after combing through many worksheets was exactly the tax which I would pay on my dividends if I had to pay tax on dividends.  My taxable income is below the threshold for paying tax on dividends so my actual tax before credits is based on the taxable income minus  qualified dividends.  That is reflected on the Qualified Dividends and Capital Gain Tax Worksheet on my (parent's) tax return.  Even when I add my child's taxable income to my taxable income (before deducting the dividends), the total is still below the threshold for taxing dividends.  When I looked at the worksheets for my child's return, there is no Qualified Dividends and Capital Gain Tax Worksheet (because my child does not have Dividends or Capital Gains).  There is only a Form 8615 D worksheet.  

The result is that the tax owed by my child is significantly higher than if it did not add back the amount for the untaxed dividends.  Perhaps an easier way to describe this is that the worksheets show the calculation being: Parents' taxable income + child's taxable income = Total taxable income.  However, in my case, I would have expected the calculation to be (Parents' taxable income - qualified dividends taxed at 0%) + Child's taxable income.  The sum of the two taxable incomes is still below the threshold for paying tax on qualified dividends.  

I know this is somewhat complicated.  I am just trying to figure out if there is an error in Turbotax which does not recognize the untaxed qualified dividends or if Turbotax is correct and simply having to file 8615 eliminates the tax break for untaxed dividends.  

[KathrynG3]

It depends what details have been captured and how. 

2019 Form 8615 Instructions for Tax for Certain Children Who Have Unearned Income page 1: Your parent may be able to elect to report your interest, ordinary dividends, and capital gain distributions on his or her return. If your parent makes this election, you won’t have to file a return or Form 8615. However, the federal income tax on your income, including qualified dividends and capital gain distributions, may be higher if this election is made. For more details, see Form 8814, Parents’ Election To Report Child's Interest and Dividends.

You are correct, the rules have changed for Form 8615. Please see: SECURE Act (Dec 20, 2019) Retroactive Change to Kiddie Tax for more information. The law change in December 2019 repealed unfavorable Kiddie Tax rates for 2018 and 2019. If you were affected in 2018, you may want to consider amending your return(s) for 2018.

I recommend that you run the tax returns both with including your child's income and without to determine your best approach.

For more details:

How do I report my child's investment income?

2019 Form 1040 Instructions page 31

@Greenfroggies

[Greenfroggies]

Thank you for taking the time to respond, but I am afraid that you did not understand my question.  As an FYI, I have run the calculations both ways.  I am very familiar with the Secure Act.  The amount of the scholarship necessitates the filing of a return for my child.  As I stated in my post,  my child did not have dividends or capital gains.  My child only had unearned income because of scholarship funds.  The dividends I mentioned belong to the parent, not the child.  As I mentioned, my situation is a bit complicated, and I recognize that my issue is extremely uncommon.  

[KrisD15]

Scholarship income is funny, it is reported on line 1 of the 1040 and is not considered as unearned income, although it is not considered as earned income for the Earned Income Tax Credit unless it was reported on a W-2. It also does not add to the Federal filing requirement.

Report the amount of scholarship in the education section of the student's return (not the 1098-T, just the amount the student needs to claim). 

It should flow to line 1 with "Schol" written next to it. 

[Greenfroggies]

Thank you for your effort, but your suggestion resulted in an even higher tax (higher than filing form 8615 Pre-TCJA and using TCJA).  I am quite sure that we do have to file the 8615 as my child meets all the criteria outlined in the IRS form for having to file 8615 including more than $2200 in scholarship aid.  

[DavidS127]

It may help to refer to the Instructions for Form 8615, line 7 at this link.

[Cuong]

I came across this same issue. After a few hours trying to figure this out, I think Turbo Tax does not factor in qualified dividends as long term capital gain (ie. 20%) when it calculates family's aggregate tax (parents + child income). Instead, it treats qualified dividends as standard income and tax at marginal tax rate.

You can see this on form 8615D Wks. Page 2 is Family's Aggregate Line 7 Schedule D Tax Calculation. Line 2 on this page is for qualified dividends. However, it does not show the amount of qualified dividends that I entered. It keeps showing 0.

[Greenfroggies]

This past weekend, I took the time to download the IRS forms and instructions and calculate the tax manually.  The IRS instructions for Form 8615 say to use the Qualified Dividends and Capital Gain Tax Worksheet to figure Line 4 of the 2019 Tentative Tax Based on the Tax Rate of Your Parent Worksheet unless you have to use the Schedule D Tax Worksheet or Schedule J.  Those instructions outline exactly which Worksheet to use.  In my case, according to the IRS instructions, the Qualified Dividends and Capital Gain Tax Worksheet should be used.  Line 12 of the 2019 Tentative Tax Based on the Tax Rate of Your Parent Worksheet is what goes on Line 7 of Form 8615.  TurboTax incorrectly populated Line 4 using the information from the Schedule D Tax Worksheet.  

I called TurboTax back yesterday and spoke to someone who walked through everything with me.  She clearly understood the issue.  She is working on my case and has already followed up with me a few times.  She said she will follow up again tomorrow.  When I have additional information, I will post an update.  

[Cuong]

Thanks Greenfroggies. Pls do post your findings once you have them.

[Greenfroggies]

Hi Cuong,

I heard back from TurboTax this afternoon.  They don't have a fix yet, but she confirmed that the software is not calculating the tax correctly.  She could not give me a date when the software will be updated; however, she suggested waiting for awhile since the tax deadline has been extended to July 15th.  She said that in the event that the software is not updated, they will recommend overriding the form so that I can file on time.  However, it is better to wait because overriding the form may mean that the return is not covered under  the 100% Accurate Calculation Guarantee. When I mentioned that someone else had responded to my post in the forum with a similar problem, she said that you should contact TurboTax and tell them that Form 8615 is not calculating correctly.  She said that the more people who contact them with the problem, the more likely it is that the software will be fixed.  Good luck!

- Greenfroggies

[Cuong]

Great. Thanks. Will contact Turbo Tax directly also.

[itwillworkthistime]

Hello Greenfroggies, did you ever get your turbo tax problem resolved?

I haven't even been able to get turbo tax to use the "Tentative tax based on the tax rate of your parent worksheet".  At least you were able to get turbotax to use the worksheet.

Which version of Turbo Tax are you using?  Furthermore is it the Online or CD version?

 I got the forms from the IRS and manually filled it.  Haven't mailed it in  yet.  

My case is similar to yours except what triggered form 8615 is qualified dividends and capitals gains for my daughter.  Figuring the tax based on the "Tentative tax based on the tax rate of your parent worksheet" results in a drastically lower tax.  

But turbo tax did not even ask anything about the "parents" taxable income.  So I know that it is not updated with the latest changes due to the SECURE act.

[Greenfroggies]

Hi Itwillworkthistime,

I purchased the download version of TurboTax, but I also used the online version.  They are both wrong.  I actually had to use the worksheet manually in order to arrive at the correct rate. Turbotax gave me the wrong calculation.  TurboTax did  ask about the parents' taxable income, but in my case it picked up the Schedule D worksheet when it should have picked up the Capital Gains and Dividends Tax Worksheet.  TurboTax contacted me to tell me that the issues had been resolved, but I when pointed out that in fact the calculations were still incorrect, they did end up acknowledging that the problems had not been fixed.  Furthermore, they doubted that they would be fixed before the tax deadline or even at all, so they advised me to override the number with the correct number.  You can do this yourself in TurboTax, but they will also walk you through it if you would like.  You will, of course, need to know what the correct amount should be, based on filling out the worksheets manually.  So, in the end, I had to override the Form 8615 number on my child's return per their instructions.  I will tell you that four weeks after e-filing my own return, my return has not been approved.  The IRS told me that it is in the "errors" department, but that no error has yet been identified.  I don't believe there is an error, and the representative told me that there may very well not be an error.  However, she said it could take up to 60 days for the review because they are so backlogged.  I suspect, though I could be wrong, that my return needs to be synced up to my child's return which had to be submitted by snail mail which further delays the processing.  If using the pre-Tax Cut and Jobs Act calculation for Form 8615, TurboTax cannot e-file the return.  While I am due a refund, I owed money for my child's return.  The IRS account information does reflect that they have credited the payment to my child's 2019 taxes, but they have not yet processed the return itself.  This is an exercise in patience.  Hopefully, TurboTax will accurately calculate the forms for 2020.  I think that because relatively few people were affected by the Form 8615 calculation errors, TurboTax opted not to invest the resources to correct them.  You really had to have a very unusual and specific set of  circumstances for the miscalculation to occur.    Good luck!

[itwillworkthistime]

Thank you Greenfroggies.  Your post helps a lot. Yeah. 

Hope you get your refund soon.  You would think that the IRS would be set up for remote work  better than the rest of us 😀.  

Will send in my daughters return with the 8615 by mail.  If my calculations are correct, the pre-TCJA rules reduces what I owe dramatically.  

[Greenfroggies]

Thank you Itwillworkthistime. The pre-TCJA rates will, in most cases, result in a significant savings.  I also saw a dramatic difference.  The ridiculously high rates used to calculate Form 8615 under the TCJA rules were an unintended consequence of fast tracking the TCJA.  Fortunately, Congress allowed for a fix.  Good luck to you!