when taxable scholarships become unearned income

[Majk_Mom]

@Hal_Al  

You've said taxable scholarships are a hybrid between earned income and unearned income. My question concerns when they flip from one to the other. My college student is applying for another taxable scholarship, which could kick their total earned income above the dependent/standard deduction. Is that the trigger? (And which is correct below?)

a) With no taxable income, no kiddie tax is due. (TT files Form 8615 to show that, right?)

$9,013 net earned income + $6,950 taxable scholarship (earned income) = $15,963 earned income + $187 unearned income (529 taxable earnings) = $16,150 total income – $16,413 (dependent deduction: $15,963 + $450) = – $263 taxable income (no taxable income)

b) But since $15,953 (or is it $16,150 or $16,413) is > $15,750 (2025 standard deduction), is the $6,950 taxable scholarship now considered unearned income? So, that’s $7,137 unearned income ($6,950 + $187), and the first $1,350 is not taxed, the next $1,350 is taxed at the dependent’s tax rate, and the last $2,700 at the parent’s marginal tax rate?  (Or thereabouts?) 

Thanks for your help. 

[VolvoGirl]

Don't know about most of your question but the Standard Deduction for 2025 for Single is only 15,750 not 15,963.

The 2025 Standard Deduction for an individual for whom an exemption can be claimed on another person's tax return is limited to the greater of:

…..the minimum of $1,350 or
…..Your earned income for the year + $450 (but not more than 15,750)

So you would get a minimum of $1,350 to a max of 15,750.

[Bsch4477]

Your second scenario is correct. 

[Hal_Al · Accepted solution]

It's a little more complicated than that.  Or, another way to say it is "it doesn't work like that". *

$9013 + 6950 = $15, 963 can be considered earned income for purposes of the student-dependent's standard deduction.  So he gets the full $15, 750 standard deduction, not $16,413 (the standard deduction is earned income + $450, but no more than the regular standard deduction of $15,750).

For purposes of the kiddie tax, the full $6950 + 187 = $7113 is considered unearned income and is entered on line 1 of  form 8615 and income subject to the kiddie tax is calculated, using the $2700 deduction ($1350 + 1350).  But then the taxable income, from form 1040 (after the $15,750 standard deduction) is entered.  The lower of the two numbers is actually subject to the kiddie tax.  Only $400 will be taxed at the parent's tax rate  ($16,150 - 15,750 = $400). 

Q. With no taxable income, no kiddie tax is due. TT files Form 8615 to show that, right?

A. Yes, if the student files.  But, in most cases they don't even need to file, with no taxable income. Technically the filing requirement is total income of more than $15,750.  Taxable scholarship is considered earned income for purposes of the $15,750 filing requirement (as well as for the standard deduction calculation). 

*Technically, taxable scholarship does not become unearned income at some $ limit. It is earned or unearned income depending on what you're doing with it, on your tax return.  It is earned income for purposes of the $15,750 filing requirement (2025) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows (but not undergrads), scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

[Majk_Mom]

Thank you, @Hal_Al  This is very helpful. A few questions. 

– I get the $400 calculation taxed at the parents’ rate. So, to confirm, if this is the “lower number,” our dependent will not owe any tax (at their rate) on any portion of the $7,137 unearned income?

–Re: the need (for the student) to file, in past exchanges you’ve said anyone with earned income > $400 needs to file. (Is this self-employment income only?) Beyond having total income > $15,750, my student needs to file to report taxable scholarships and 529 taxable earnings, right? (Taxed at their rate, not ours?)

My student has 1099-NEC income, W-2 income, scholarship & 529 earnings, to be clear. (They will have paid estimated SE tax by the time they file 1040.)  

Thanks for helping us understand how this works! 

[Hal_Al]

Q. So, to confirm, if this is the “lower number,” our dependent will not owe any tax (at their rate) on any portion of the $7,137 unearned income?

A. Essentially,  yes.   What happens is that form 8615 is used to calculate the student's tax, instead of some other form or just looking up taxable income in the tax tables.

Q. –Re: the need (for the student) to file, in past exchanges you’ve said anyone with earned income > $400 needs to file. Is this self-employment income only?

A. Yes.

Q. Beyond having total income > $15,750, my student needs to file to report taxable scholarships and 529 taxable earnings, right?

A. Yes, but only if the filing threshold's for those income types are met.*

Q. Taxed at their rate, not ours?

A. That depends on the various amounts and the form 8615 calculation.  But, probably not from what you've described. 

* Your dependent student must file a tax return for 2024 if he had any of the following:

1. Total income (wages, salaries, taxable scholarship etc.) of more than $14,600 ($15,750 for 2025).
2.  Unearned income (interest, dividends, capital gains, unemployment, taxable portion of 529 distribution, but not any scholarship) of more than $1300.
3. Unearned income (not including scholarship) over $450 and gross income of more than $1300 ($1350 for 2025).
4.  Household employee income (e.g. baby sitting, lawn mowing) over $2600 ($14,600 if under age 18)
5.  Other self employment income over $400, including money on a form 1099-NEC