Taxable scholarship - tax implications for federal and NJ state

[Tax_Fledgling]

My child resides in NJ (I claim them as a dependent and I live in NJ).  They attend a college in NY full time.  

Their income on their W2 (from a job in the summer) was $5665 (no federal or state tax withholdings).  They received scholarships that covered all of their tuition and also covered their room and board, which was $7990.  On the 1098-T, Box 5 - Box 1 equals $9557.  They have $814 in "other educational expenses".

My questions are:

• Do they need to file a federal tax return if the amount is under the federal standard deduction?
• Do they need to file a NJ state tax return?
• Since I don't receive an education credit for them, would it make more sense for them to file separately (as a non-dependent)?  Is seems like we would save around $250, if I removed them as a dependent and they filed separately.  I just don't understand the implications of doing that (are they now a resident of NY, do they have to pay NY tax AND NJ tax then?)

Thanks!

[DaveF1006]

Since your child is a dependent, their filing requirements depend on their earned income and unearned income. For 2025, a dependent must file a federal tax return if:

• Their earned income exceeds $14,600.
• Their unearned income exceeds $1,300.
• Their gross income is more than the larger of $1,300 or their earned income (up to $14,150) plus $450.

Since your child's earned income is $5,665, they do not need to file a federal tax return based on income alone. However, they may want to file if they qualify for a refund or other credits.

New Jersey State Tax Return Filing

New Jersey requires a tax return if a resident's gross income exceeds $10,000 for single filers. Since your child's earned income is below this threshold, they do not need to file a NJ state tax return unless they had NJ tax withheld and want a refund.

Filing Separately as a Non-Dependent

If your child files separately as a non-dependent, you would lose the ability to claim them as a dependent, which could impact your tax situation. However, if removing them as a dependent saves you $250, it might be worth considering.

Implications of Filing Separately

• Residency Status: Your child is still considered a NJ resident since they live there when not in school. Their college attendance in NY does not automatically make them a NY resident.

State Tax Obligations:

• If they earned income in NJ, they would file a NJ tax return.
• If they earned income in NY, they may need to file a NY tax return as a nonresident.
• If they earned income in both states, they might need to file both.

Since their summer job income was $5,665, it's important to check where they worked. If it was in NJ, they would only need to file in NJ (if required). If it was in NY, they may need to file a NY nonresident return.

Let us know if this answers your question.

[Hal_Al]

Q. Do they need to file a federal tax return if the amount is under the federal standard deduction?

A.  No. But, at your other post, you indicated you are using the "loop hole" to claim the tuition Credit. If you add another $4000 of taxable scholarship to their income, they would have to file.

Q. Do they need to file a NJ state tax return?

A. Yes.  

Q. Since I don't receive an education credit for them, would it make more sense for them to file separately (as a non-dependent)? 

A. No. They are not eligible for the refundable credit*. And there is no net taxable income (so, no tax) to take a credit against.

Q. Is seems like we would save around $250.

A. I don't see how.

Q. Are they now a resident of NY?

A. No, not even if the summer job was in NY.  But they may have to file a NY non resident return, as well as a NJ resident return. 

*While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out.  A full time student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)