Q. My daughter has 19K in unearned taxable income from a scholarship after tuition payments?
A. Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400). 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 income is earned income ( "compensation") for IRA contributions.
Q. Is there a way to reduce her tax burden?
A. Yes. Because it is earned income for purposes of the standard deduction calc, the first 12,950 will not be taxed and the first $14,100 (12950 + 1150) will not be subject to the kiddie tax.
Q. She is independent (not your dependent?), lives in another city.
A. Maybe not, if she lives in another city primarily just to attend school.
There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.
A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
- He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
- He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
- He lived with the parent (including temporary absences such as away at school) for more than half the year
