Hi, @Hal_Al
I have a follow up question to this. What if the student has unearned income from interest, in addition to unearned income from a taxable scholarship (not used towards tuition).
For example, if a student has $4K earned income from a job, $2K unearned income from interest, and $6K unearned income from a scholarship, how does the kiddie tax come into play?
On Form 8615, is the unearned income on line 1 supposed to include the interest AND the scholarship? If so, in my example, this would result in unearned income of $8K (instead of just $2K) minus $2300 equaling $5700. Taxable income from the 1040 would be $12K-$10K (because you can deduct the scholarship as earned income here) -$400 = $1600. Since that is lower than $5700, does that mean the $1600 (which is basically the interest less the $400 deduction) is subject to the kiddie tax? If so, that basically means that if a student has a taxable scholarship greater than a pretty minimal amount plus additional unearned income, then the $2300 kiddie tax deduction never really comes into play because other than the first $400, the non-scholarship unearned income will be completely subject to kiddie tax (instead of just the amount over $2300).
The only way I could see this being remedied is if the 8615 line 1 is not supposed to include taxable scholarships. But the instructions don't read that way. It just seems unfair that in my example you would not pay kiddie tax on the $1600 of interest if the interest was your only unearned income, but that you do pay kiddie tax on the $1600 of interest if you have taxable scholarships (even though those scholarships aren't actually taxed as long as below the standard deduction). Thanks for any clarification.
