Scholarship income

[briandsmith]

You have been helping me with this return already.

My granddaughter has an athletic scholarship and must file a return. The tax on her income is about $800 from the tax tables. TT is reckoning her tax based on her father's income and shows her tax burden to be almost twice as much. This is something to do with her being claimed as a dependent on her father's return.

Form 8615 is the culprit (tax for certain children who have unearned income). I looked up a definition of unearned which said it referred to stocks and bond income, neither she or her father have any. If I delete this form, TT computes the right amount of tax but the form shows up in the list of forms as undone.

The tax benefit her father gets for claiming her is in his state tax.

I know I can take her off as a dependent but please advise of the right way to input it.

[KrisD15]

Scholarship income is reported as earned income on the student's 1040 Line 1. 

Not unearned. 

According to the IRS:

"Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1."

 Click on Wages & Income

(If the program asks about your W2, select Skip for now )

Select answers to the following questions if necessary to move forward 

Click Add more income 

Scroll down to the VERY LAST option "Less Common Income" and click Show more

On this new drop-down list scroll down to the VERY LAST option "Miscellaneous Income" and click START 

On this new drop-down list scroll to the VERY FIRST option "Other income not already reported on a Form W-2 or Form 1099"

Click START

Select YES to the page titled "Other Wages Received" and Continue

Select CONTINUE on the "Wages earned as a Household Employee" screen (enter nothing here)

Select CONTINUE on the "Sick or Disability Pay" screen (enter nothing here)

Select "Yes" on the "Any Other Earned Income" screen and continue

Select "Other" on the "Enter Source of Other Earned Income" and Continue

In Description Box type "SCH" and the amount.

[Hal_Al]

TT is correctly generating form 8615.  Taxable scholarship is a "hybrid" income.  It goes on line 1 of form 1040 (with wages) but with a  notation (SCH on the dotted line to the left). Scholarship is treated as earned income for the purpose of calculating the student's standard deduction (note that she gets the full $12,550). But scholarship income is unearned income for purposes of the "kiddie tax" (form 8615). 

Scholarship income should be entered in the education expenses section of TurboTax, not the wages and income section.

[briandsmith]

Thank you for this reply.

If I read it correctly, it is showing me how to input her income to her parent's return.

The scholarship generates enough income that she is required to file federal, Oklahoma and California returns (that is how I read the requirements).

Your reply suggests to me that she does not need to file but her income should be added to that of her parents. Is that your understanding of the requirements?

[briandsmith]

Thank you for the help.

I have just replied to the response from KrisD15. It is my impression you are both saying that her income should be added to her parents' return and that she does not need to file a Federal return?

When I look at the requirements, I read that she should file 3 returns, one Federal and two states because they have income tax?

If I prepare all three, it all comes down to where she is dependent.

[Hal_Al]

No, we are not saying her income goes on your return.  KrisD15 and I agree that the scholarship income must be reported on her (the student) tax  return.  What we disagree on is where it can or should be entered, in the TurboTax (TT) program. If you enter it in the  wage and income section, TT will not place the SCH code on the dotted line at line 1 of form 1040.  Income on line 1 without a W-2 or a dotted line code is a red flag. 

She does need to file her own federal return.  Since she is your dependent, she needs to file in your home state.  She does not need to file a state return for the state where the school is located.  Scholarship income (since it is unearned) is not subject to tax in the school location state  (job income would be).  If you decide to enter it in the wages section (rather than in education/scholarship) then a school state return is (probably) also required.

[briandsmith]

I had a closer look at this and your colleague's response. You are indeed showing me how to input to her return.

I followed your instructions and her tax went up to nearly $3500. I had left the 1098-T income in the return which explains the increase. You didn't mention it in your put but your colleague said I should.

I think the only way to resolve this is to remove her as a dependent on her father's return. 

[Hal_Al]

@briandsmith  said "I think the only way to resolve this is to remove her as a dependent on her father's return".

No. The "kiddie tax" is NOT based on her being a dependent.  It's because she is a full time student, under age 24, whose earned income is less than half her support*.  The father giving up the the tax benefits, of a student-dependent, will not reduce the student's tax.  Furthermore, she is still required to report that she CAN be claimed as a dependent, even if not actually being claimed. 

What are her numbers?  Box 1 and box 5 of the 1098-T?  Books and computer?  Any other income?  Is the parent's income too high to claim the Tuition Credit?

*Reference: https://www.irs.gov/taxtopics/tc553

[briandsmith]

Box 1 is about 20K Box 5 is about $42K Her father's taxable is only $90K.

I have calculated this several ways now, with or without dependents but never get away from form 8615. As soon as I add her Dad's info, she is taxed at his rate. I just do not understand that form.

Thanks for all your help.

[briandsmith]

I had another question from your input. You mentioned the tuition credit. that would make it better for her folks but in her case the tuition is paid by the school. I have been assuming she doesn't qualify?

[Hal_Al]

There's a loop hole available.  The student declares another $4000 of scholarship (or at least $2000)*  to be taxable, that way the parent can use that much tuition to claim the Credit.  You cannot use the loop hole if the student's scholarship is "restricted" (that is it must be used for tuition).  Most scholarships are not restricted (the schools are aware of the "loop hole"). 

*For the American Opportunity credit, the first $2000 of tuition gets a 100% credit ($2000 tuition paid = $2000 Credit).  The next $2000 gets a 25% credit. 

[briandsmith]

I think I have satisfied myself that Form 8615 is necessary but I am still confused at how I put the income into her return. Do I do it by the line 1 with SCH or by the 1098-T or both?

Also I have a question on where TT gets the parent tax on line 10 in Part II of 8615? The run I made came up with a number that is nothing like the tax on her father's return.

[Hal_Al]

Q.  How I put the income into her return. Do I do it by the line 1 with SCH or by the 1098-T or both?

A.  Both. But, you let TT do it.  You enter it at the 1098-T section. TT puts it on line 1 (form 1040) with SCH.  

Q. Also I have a question on where TT gets the parent tax on line 10 in Part II of 8615? 

A. You enter it in the interview.  So, the parent has to have completed his return first (if not, an estimate is close enough). 

You haven't said whether the parent will be claiming the AOC.  At $90K taxable, he's only eligible if filing MFJ (jointly). 

[briandsmith]

Thanks again to you both for your help. When you say you disagree on how it should be input, I input it in the Education interview and I just noticed that TT has put it on line 1 with the SCH notation. I was concerned from your replies that it had to go in twice, which seems unfair.

I will follow up on your thought that she does not need to file in the school's home state, I admit to being confused on the definitions of earned and unearned. When I checked the requirements of the school's state I was thinking of it as earned.

Thanks so much again.

[briandsmith]

Thanks again.

I had not noticed that TT had put the income on line 1 with the SCH notation so that part is correct.

I'll go through the interview again but I have no recollection of inputting her father's tax.

I did complete the Education section on her father's return but TT says that AOC cannot be claimed in her case. They are filing MJR.