Under the new tax law for 2018, will the taxable part of scholarships be taxed at the rate of 37% above $10000 like other unearned income?

Forum|Forum|7 years ago
June 5, 2019
6 replies
177 views

Taxable part of scholarship being the amount used for room and board. It is unearned income but is not money from a 'money making enterprise' i.e. interest, etc. This is in relation to the kiddie tax rate of 2018.

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Best answer by TaxGuyBill

Yes, unearned income (including scholarships) is subject to the Kiddie Tax. For 2018, Kiddie Tax rules change and wil be taxed at Trust rates.

However, for some mysterious reason the Standard Deduction treats scholarships as 'earned' income. In other words, the student will get the $12,000 Standard Deduction, and only the income above that would be subject to Kiddie Tax.

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maglib

Level 11

every scholarship is different, if working like a TA or research student it can be earned income and reported on a w-2 so that will matter how the scholarship is reported. Do note if you don't claim your student (no exemptions) although they are your dependent, don't claim them, they can get the non-refundable education tax credits and reduce the kiddie tax and income taxe on their return. You can still add them back for state purposes (check your state rules). So it may be beneficial to try it both claiming them and taking education deductions on your return and trying to not claim them and allow them to take it and see which scenario provides more value. Since the 2018 tax law has truly not been finalized, there are too many open issues that different sources are claiming opposing answers. Will they get a $12k standard deduction, 2018 calculators show they do but many have said that's not true. I'm just waiting till June until the IRS actually finalizes the regulations and the experts have read the tax law.

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michael-w-smithAuthor

Level 2

Thank you. My 19 year old son will have no earned income but $20,000 in scholarship money beyond tuition and books. If they don't fix it, it appears that students in his particular situation will fall into an abyss in the tax code and pay horribly. The kiddie tax was intended to close a loop for rich people that pass along unearned income to their children.

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maglib

Level 11

$20k in scholarship money in excess of tuition and fees as if he's being paid to go to college?
We don't claim our child and he takes the AOTC to cover his kiddie taxes, we were losing benefits for taking him and in the end it made more sense that nobody claimed him due to his high taxable income. In your situation it will probably be the better idea too. with no exemptions next year, this may be valuable for many.

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michael-w-smithAuthor

Level 2

Yes... that covers room and board and other community development projects. The AOTC cannot be claimed when the qualified tuition is covered by grants or scholarship funds and there is no out of pocket expense.

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maglib

Level 11

I'd be thrilled if all I had to do was pay the taxes and not the tuition.... Awesome, you must have a very smart student.

**I don't work for TT. Just trying to help. All the best. . ***Say "Thanks" by marking as BEST ANSWER and clicking the thumb icon in a post and that I solved your question. **Mark the post that answers your question by clicking on "Mark as Best Answer" I am NOT an expert and you should confirm with a tax expert.

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TaxGuyBillAnswer

Level 13

Yes, unearned income (including scholarships) is subject to the Kiddie Tax. For 2018, Kiddie Tax rules change and wil be taxed at Trust rates.

However, for some mysterious reason the Standard Deduction treats scholarships as 'earned' income. In other words, the student will get the $12,000 Standard Deduction, and only the income above that would be subject to Kiddie Tax.

M

maglib

Level 11

Then I saw people say since it's earned income it will be eligible for the education credits on top of the $12k standard deduction, others have said the $12k won't apply and all the confusion with no exemptions....

**I don't work for TT. Just trying to help. All the best. . ***Say "Thanks" by marking as BEST ANSWER and clicking the thumb icon in a post and that I solved your question. **Mark the post that answers your question by clicking on "Mark as Best Answer" I am NOT an expert and you should confirm with a tax expert.