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?

[TaxGuyBill]

I'm sorry, but all of that is clearly against the Tax Code, as I explained above.  You just got lucky with an IRS auditor not wanting to push the issue.  I 100% guarantee that if the IRS auditor disagreed with you and you took it to Tax Court, the Tax Court would say that is not allowed.

[maglib]

@TaxGuyBill @michael.w.smith then again to claim yourself all you needed to do is provide over half your own support from sources which can include gifts or savings.  I was just reminded of this last night when I went to dinner with the tax partner and discussed this topic again. Parents can gift unlimited to you, although reportable after $14k each parent.  Only for the refundable education credits would you have to provide over half your support from current year earned income, including SE.  TT does go through interview asking about at least half your support from earned income.  Kiddie tax only applies if you were a full time student for at least 5 months under 24 but not to at least half time student with earned income for support.  Most schools individual semesters are not at least 5 months, Most schools are mid-Jan to early May, and Mid Sept to Mid Dec. only if attending both semesters are they in school 5 months. Many students do internship and coop programs give no credits for school and may be out of state too.

[TaxGuyBill]

"Only for the refundable education credits would you have to provide over half your support from current year earned income."

That applies to the Kiddie Tax as well.

[maglib]

yes, agree interns and coops and other 1099Misc, self employment income, can and often do provide over half their support from earned income. Knowledge about where income can come from, even SE income may be a lower tax rate than the 39.6% rates at the students kiddie tax rate.  Only if the student does not get credit for the internship and coop would it not apply to full time student rule, otherwise it is part of the 5 month rule.

[maglib]

@TaxGuyBill with the student getting up to the $12k standard deduction next year, unless the scholarship recognized as income is over that, the taxable income will end up $0 even with the kiddie tax.  I just tested a student in TT this year making $6350 in room & board scholarship, it added it to the kiddie tax and yes got reported but bottom line no tax owed and I assumed the parents were at $400k in income and divs of $25k. Next year it will be $12k.  Intertwining a scholarship and making it earned income up to $12k may be the most beneficial thing someone can do next year to maximize full Education tax credits.

[TaxGuyBill]

Yes, that is what I mentioned in my original answer above.

[cminnich]

@TaxGuyBill  - Since a scholarship that is applied to unqualified expenses is considered unearned, why is it not subject to the greater of $1,050 (or $350 plus earned income) filing requirement?  

For 2018, the standard deduction for a taxpayer who can be claimed as a dependent by another taxpayer cannot exceed the greater of (a) $1,050 or (b) $350 plus the dependent's earned income.

[TaxGuyBill]

As I stated in my original answer, although it is unearned income, for some bizarre reason the IRS allowed the Standard Deduction for 'earned income' ($12,000) against it.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p501.pdf#page=4">https://www.irs.gov/pub/irs-pdf/p501.pdf#page=4</a>

[dosmom1234]

@TaxGuyBill    I  I am in a very similar position with my son  but he also has a 529 plan .  His tuition was $4700, 529 distribution was $4,500, scholarships $14,000, earned income from job $8000.   His scholarships paid for all of his room and board plus even other non-qualified expenses.  last year I claimed him and took the education credit based on the 529 plan since I am the account owner and he only had one semester.    With the new kiddie tax rates this year he would have to pay three times as much in taxes.   

 Are there any options this year to lower his unearned income portion?   His scholarships didn’t pay for qualified expenses so can any of it be moved to taxable income ?  

 If scholarships are not included in the support test then he might be able to claim himself.   If he does will that change anything on the kiddir tax amounts?

Thank you

[dill4fam]

This has been a great discussion.

 Dosmom1234: having him contribute the max to a Roth will shift more of the taxable scholarship UNDER the deduction/kiddie tax threshold amounts.

I’ll throw a wrench in here with: is a 529 distribution considered support provided by the student?

If a non-qualified distribution, the 529 withdrawals are taxable income to the student, it’s considered a completed gift of the parent for estate tax purposes. Yet no where is there a definitive answer for the support test.
I’m getting more than frustrated with tax policy contradicting itself or being vague!

[dosmom1234]

Yes. I have read that it is possible that the prepaid plan is support by him.  The distribution is only $4700 so I think He is still under the 50% support.  His scholarships pay for almost all of his food and extra stuff. We pay his insurance for health and car, plus he stays with us 2 or 3 months out of the year and goes on vacation with us.

Is support considered any expense paid regardless of what it is?  A weekend at the beach?

[dill4fam]

btw login before you reply to anything or you'll lose your comment..ugh!

Anyway...@dosmom1234 , where did you find the source of a pre-paid 529 being student support? Interesting, because prepaid 529s are mostly limited to paying for qualified education expenses. The comments above indicate the taxable "room & board" scholarships are disqualified as student support because they are a third party(gift). Again this goes back to if COA (QEE+R&B) is paid fully with a 529 is this student or parent support?

As for the beach trip...my understanding for the support test, would be you would calculate this just as you would for the room & board portion you apply to your student.....the student expense for the beach trip would be the vacation cost divided by the number of family members. If the student reimbursed you for his portion (student support), if not then that portion was a gift to the student (parent support).

[tlgof63]

@TaxGuyBill My dependent college student earned 7k wages and 8k (unearned) taxable portion of scholarship which I know is kiddie taxable and we would use form 8615 to figure the tax.  

My questions are 1) the initial reporting place for the 8k
and
2)"type" to fill in blanks for the 8k:  line 1 1040 with the 7 k but as "SCH", or Sch 1 line 21(22)/line 6 1040 (and if Sch 1 IS where, its reason or type to fill in blank with-"taxable scholarship"," taxable 8863", "taxable 1098t"...?)  

Also am I correct in thinking for income purposes the 8k is "unearned" but for figuring her standard deduction it is "earned"?     
Final question related to this answer and above answers:   3) If Sch 1 line 21(22) is the proper reporting place for this unearned income, but it is considered "earned" on standard deduction worksheet, it is in conflict with the "earned" definition notes at bottom of the standard deduction worksheet--- "generally earned income is the total...of 1040 line 1...and Schedule 1 lines 12 and 18..."---  unless it is an exception and a reason the form says "generally."

Just making sure I get the monies in the correct spots and also apply the proper deduction to reduce her kiddie taxable money as much as is allowable.

[dosmom1234]

@dill4fam  So here is where I am at in tying to determine if he qualifies for the kiddie tax.  According to 8615 and the tax software, if he earned (wages) more than half of his support he does not qualify for the kiddie tax and his taxes are lowered by $1,000.  He had $8K in earned (job) income.  The question is the support.  His total support including everything we paid for and that his scholarships paid for and the 529 which paid only for tuition is around $26K.  Of the $26K his scholarships paid for $12K.  He really didn't have to pay for anything because his bank account grew by the $8K he had in earned income.  

What is the math when determining if he earned more than half of his support, what is the dollar amount of the support is scholarships are excluded?   Is it $8k/$14K ($26kbsupport less $12K scholarship amount) if we exclude scholarships which means he did earn more than half of his support?

[dosmom1234]

@dill4fam  His 529 plan only paid tuition, his room and board, food and other expenses were covered by his scholarship.  In reality, his scholarship covered all of his expenses including gas and entertainment.