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?

[michael-w-smith]

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.

[maglib]

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.

[michael-w-smith]

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.

[maglib]

$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.

[michael-w-smith]

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.

[maglib]

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.

[TaxGuyBill · Accepted solution]

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.

[maglib]

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....

[TaxGuyBill]

"I saw people say since it's earned income it will be eligible for the education credits"

Can you clarify what you mean by that?

[maglib]

Since they are getting $12k standard deduction, I've seen some say if reported as earned income, they would report it in income section and then take a deduction for the amount paid in education section and treat it differently for reporting, the IRC rules for the scholarship don't necesarrily say where it must be reported and they can get around kiddie tax reporting it as earned income. Also with elimination of exemptions, students scholarship can qualify as their own support and then the student should claim themself. The IRS has not clarified scholarships as support or not nor has the IRC code said where they must be reported and there is leeway in the definition of earned and unearned in all scholarships that could be argued by lack of specifity in the IRC code.

[TaxGuyBill]

"they would report it in income section and then take a deduction for the amount paid in education section"

Yes, it is common to intentionally make MORE of the scholarship taxable in order to claim the American Opportunity Credit.


"they can get around kiddie tax reporting it as earned income"

No true.  The Kiddie Tax is very clear what is earned income, and for purposes of the Kiddie Tax, scholarships are unearned income.


"Also with elimination of exemptions, students scholarship can qualify as their own support and then the student should claim themself"

No.  Section 152(f)(5) specifically says if the person is a child of the taxpayer, scholarships are NOT considered as paying for their own support, so that would NOT allow them to claim their own exemption.  That fact that the exemption amount has changed to $0 does not change that.

[maglib]

<a rel="nofollow" target="_blank" href="https://www.journalofaccountancy.com/issues/2011/may/20113902.html">https://www.journalofaccountancy... is not very clear, here is the same argument

[TaxGuyBill]

What is not clear?  As I said before and as that article points out, §152(f)(5) says scholarships are not considered as the child paying for their own support.

[maglib]

the article goes on to say why scholarships can be used for support test.  It gives both arguments.

[TaxGuyBill]

No, there aren't any "arguments".  There are different rules for different situations.

Go back and read the third and fourth paragraph carefully.  The article points out that the rules are different for a "child" (son/daughter) than for other relatives (such as a grandchild), and the examples are about a non-child (grandson).

For a "child" (son/daughter), scholarships do NOT count as them paying for their own support.  For a non-child (such as a grandchild), they do count.