Scholarships and Kiddie Tax

[cjbaker790]

Not quite sure where to start. My daughter is in college. Has scholarship for full tuition, plus an extra $1000 to spend as she likes. Other income is a W2 from the college for grading papers, a W2 from a company for tutoring, a 1099-NEC for other tutoring, and a 1099-NEC for DoorDash. So the only unearned income is $1000, right? TurboTax asks me for parents information, and when I enter it jumps her tax owed from $1300 to $2900. I assume that's kiddie tax, but why?

Also don't see place to enter 1098-T. Do I just enter it under the general scholarship question and then list the $1000 less amount when it says how much for qualified expenses? Does it matter if she spent the other $1000 on books etc.? It was not designated as such, free to spend as she likes.

Thanks.

[Hal_Al]

Yes, that is the kiddie tax.  She actually has no "unearned" income. 

The most likely explanation is you have entered the 1099-NEC as misc. or other income, rather than as self employment (earned income). You probably entered the$1000 scholarship as other income, rather than scholarship (taxable scholarship is treated as earned income for purposes of the kiddie tax and dependent standard deduction). 

As you surmised you do not need to enter the 1098-T, as it was all covered by tax free scholarship (more on that below).  You also do not need to enter the $1000 spending scholarship as she can claim it was used for books. 

_____________________________________________________________________________________

 There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

[cjbaker790]

Thanks. I think the program is very clumsy for this in general. She has two items definitely entered in 1099-NEC going step-by-step. In the "choose what to work on" summary it only shows the amount for one of them, only $147 (no expenses to claim), the amount for the other shows up under "business income and expense" total, I guess because there were expenses to claim (DoorDash, about $1500).

When it says I'm done with income it shows that her income is an amount that has to include her scholarship money, whereas for 2019 it clearly didn't. I have no idea why. Under the Scholarship section it says $0 under Tuition and Enrollment fees and says I entered that elsewhere, but I don't know where. I have $17,300 entered a couple screens later when it asks if you received any scholarships, and on the other screen I have that $1000 is not designated for expenses because it isn't. Some used for books, but not designated as such, and per the help bubble it doesn't. Even after entering that, in the overview it shows $0 under "Expenses and Scholarships". It's like it's treating the scholarship like wages.

[Hal_Al]

 "Under the Scholarship section it says $0 under Tuition and Enrollment fees and says I entered that elsewhere, but I don't know where". 

For that problem, try this: 

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to the section you want to change; tuition, in your case (click edit next to the school name).

[cjbaker790]

Thanks, that finally got me to the screen to enter the 1098-T info, and seems to have taken care of the kiddie tax problem, but it still shows $23k for wages and salaries in the summary, clearly including the scholarship amount. Is that correct? It didn't include the scholarship there last year.

[Hal_Al]

Q. but it still shows $23k for wages and salaries in the summary, clearly including the scholarship amount. Is that correct? 

A. I don't have a clear picture of her info to answer that.  But from what you describe ("scholarship for full tuition, plus an extra $1000"), it would be highly unusual for her not to have some  taxable scholarship, if you are claiming the tuition credit.  Based on that limited info, she should have $4000 of taxable scholarship.  $4000 being the amount of tuition you need to claim to get the max credit.

[cjbaker790]

Thanks for all the help. Things just weren't making sense. I started from scratch without transferring data from an old return and everything worked out as it should. No idea why it was screwy, but all good now. Owed a couple hundred bucks instead of the $1300+ it was reporting on the previous effort.