My daughter graduated in May 2018 and started working July 2018 with the government for research and received a 1099-G, taxable grant. She will be a dependent on my tax return so I can get the education credit. I know she has to pay tax on it but it is showing as kiddie tax even though it is an earned income. Is this correct?
If she qualifies as your dependent, she is subject to the kiddie tax. But, any earned income, she has, is not subject to the kiddie tax. But, income on a 1099-G is not usually earned income. In order to call it earned income, she would have to report the income on Schedule C and pay self employment (social security and medicare) tax on Schedule SE.
So, if TurboTax is showing it subject to the kiddie tax, it is being reported as a grant and not earned income. For purposes of the kiddie tax, grants are not earned income
This seems wrong as it is really wages even if the government doesn't want to consider it such. It is not investment income. If she didn't work she wouldn't get anything. I think Turbo tax is making an error here as there should be an exemption for this kind of work funding