Hal_Al
Level 15

Education

QEE= $46,763+$1889=$48,652

Adjusted QEE = $48,652-$22,000= $26,652

Total 529 distributions = $46,993

shortfall in QEE = $46,993-26,652= $20,341

(I did not check your math)

 

Q.  I'm wondering if Kiddie Tax will come into play?  I think I read somewhere that scholarship might be considered unearned income?

A. Answered above, scholarship is a hybrid. And yes the kiddie tax could kick in.  That can be avoided, since the 1099-Q will go on your return. 

So, starting with the $12,950 standard deduction (SD), we'll assign $10,550 of the scholarship to be taxable. $12,950 - $2000 door dash -400 (SD = earned income +$400) =$10,550.   

 

20,341 - 10,550 = $9791 adjusted short fall. 

9791 / 11000 = 89.01% x  4526 = $4029 taxable.  9791/ 12889 = 75.96% x 5021 = $3814.  3814 is less than 4029. So, we'll enter only the $12,889 1099-Q in TurboTax (we can consider the $11,000 1099-Q as fully covered by qualified expenses).  I did look at increasing that by $1150 (the kiddie tax threshold) . It's close but doesn't work out since the 529 earnings is a smaller number.  

 

On your son's return, he enters a 1098-T with box 1 blank and $10,550 in box 5. Enter no other numbers. The $10,550 should show up on line 8r of Schedule 1. 

 

On your return, I going to recommend a short cut. 

Enter the $12889 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Enter  $12,889 of expenses. Also enter $9791 in the box "Tax-free assistance".  This reports the earnings as taxable and claims the scholarship exception for the penalty. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception. The $3814 will show up on line 8z of Schedule 1. 

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