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]

TaxGuyBill - Thank you for the information you shared in answer to the original question. If our 19 year old receives no support from us as his parents (he does not live with us, even in the summer) and he lives completely off of scholarships (unearned income), can he claim himself or not? If he earned $1000 would that qualify for 1/2 of his support? Scholarship money does not count as support, so If we are not supporting him then where does that leave him on filing? We don't want to claim him as we don't want the 'income' increase to our household. Thanks in advance.

[TaxGuyBill]

"We don't want to claim him as we don't want the 'income' increase to our household."

Can you clarify what you mean by that?  His income (including the taxable scholarship) would still go on HIS tax return, not yours.


If he has PERMANENTLY moved away (including he changed his mailing address for everything and his driver's license address), you can not claim him as a dependent, and he can claim his own exemption.  If he has permanently moved away, support doesn't matter.

However, he would still be subject to the Kiddie Tax, and would not qualify for the refundable part of the American Opportunity Credit.

[michael-w-smith]

Thank you. I didn't want to have his income added to our household income for health insurance reasons. If His income is added to our household income, we might not be eligible for discounted health insurance through the state. He does not live with us, although he has kept his mailing address our home. Hence, I'm not sure what is right or best to do.

[TaxGuyBill]

Yeah, the claiming him as a dependent may affect the Premium Tax Credit for health insurance   However, see the bottom section of this comment box.

From what I've read, the IRS assumes he qualifies as your dependent (full-time student under age 24) unless you prove otherwise.  The fact he has not changed his mailing address would seem to indicate he has not permanently moved out.

As for support, his own non-scholarship money would need to pay for over half of his total expenses, so that doesn't seem to be the case.
<a rel="nofollow" target="_blank" href="https://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf...>

So from you are saying, I interpret that he probably qualifies as your dependent.




However, just because he qualifies as you dependent does NOT mean you need to claim him.  If you do not claim him, his income will NOT count for health insurance purposes.

For his tax return, because you are ABLE to claim him, he can not claim himself (which probably won't affect his tax return for 2018, as the exemption amount will be $0).


On the other hand, claiming him *MIGHT* benefit you for health insurance purposes (in your case, I suspect it won't though).

The Premium Tax Credit is based on percentage of the Federal Poverty Level.  So if you do NOT claim him, only your income counts (which would increase your health insurance credit), BUT you would have a smaller family (which would decrease the health insurance credit).  If you DO claim him, his income would be included (which would decrease the health insurance credit), BUT you would have a larger family (which would increase the health insurance credit).

However, as I mentioned before, because his income is rather large, I suspect the benefit of a larger family size would not be enough to offset the negative affect of adding his income.  But you probably want to try it both ways to see what the best result is.

[michael-w-smith]

Thank you. You have summarized my personal conclusion, but it becomes so convoluted I wanted to be sure, as there are a lot of different answers out there. Your conclusions based on the tax code verifies my thinking. That is exactly what I did in 2017, so neither one of us claimed him. 🙂 Appreciated.

[TaxGuyBill]

Great, I'm glad I could help.

[maglib]

@michael.w.smith if you did not claim him and he didn't claim himself, he can be added back for state only purposes.  Just check your state rules if he qualifies.

[maglib]

@TaxGuyBill Publication 970 lets you choose to make a scholarship earned income or not . If earned income, then it can count as support test and can then allow a student to claim themself.  <a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p970">https://www.irs.gov/publications/p970</a> see example 2 and 3  and the note for the scenario and the IRS giving you options.  I would then consider scholarships earned income next year as that may be the lower rate. The IRS is not specific.

[TaxGuyBill]

Yes, you can choose to make the scholarship taxable.  Yes, it is included on Line 7 and counts as Earned Income for purposes of the Standard Deduction.

No, it is NOT count as paying your own support.  As we discussed above, the Tax Code SPECIFICALLY says it does not count.  No, it would not avoid Kiddie Tax.  The Tax Code is very SPECIFIC what qualifies as Earned Income for purposes of the Kiddie Tax, and scholarships are not part of that.  So scholarships are subject to Kiddie Tax, regardless if you treat them as taxable or not.

[maglib]

The issue is ambiguity of the term scholarship.  you must separate taxable and non-taxable.  IRS ambiguity of what in support test does include taxable scholarship and fellowship for support.  @TaxGuyBill
Taxable scholarships per IRS rules for support test are included as part of support. <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p501.pdf">https://www.irs.gov/pub/irs-pdf/p501.pdf</a>  Only scholarships for the qualified education expenses are excluded (and many say and that are considered earned income are which is what Journal of Accountancy refers too), the excess is considered part of the support test, In general scholarships are not but taxable portion is considered:
For purpose of support test Gross Income Test
To meet this test, a person's gross income for
the year must be less than $4,050.
Gross income defined. Gross income is all
income in the form of money, property, and
services that isn't exempt from tax.
In a manufacturing, merchandising, or mining
business, gross income is the total net sales
minus the cost of goods sold, plus any miscellaneous
income from the business.
Gross receipts from rental property are
gross income. Don't deduct taxes, repairs, or
other expenses to determine the gross income
from rental property.
Gross income includes a partner's share of
the gross (not net) partnership income.
Gross income also includes all taxable unemployment
compensation, taxable social security
benefits, and CERTAIN SCHOLARSHIP AND FELLOWSHIP GRANTS.
Scholarships received by
degree candidates and used for tuition, fees,
supplies, books, and equipment required for
particular courses generally aren't included in
gross income. For more information about
scholarships, see chapter 1 of Pub. 970.

[TaxGuyBill]

First, let's clarify that we are talking about a son or daughter.  As the Journal of Accountancy article discusses, other relatives follow different rules.



ALL scholarships are part of support.  It does not matter if it is taxable or not.  Support means money paid for a person's expenses.  It does not matter if it is taxable income, nontaxable income, from a savings account, from a third party, or whatever else.  It is ALL money spent, regardless of the source.  See Line #1 on this Support Worksheet:
<a rel="nofollow" target="_blank" href="https://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf...>

Scholarships are part of support, but we discussed above, §152(f)(5) specifically says it is NOT considered as the student paying their own support.  It is considered as somebody else paying their support.  Here is the link from Publication 501 about that:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p501#en_US_2017_publink1000220916">https://www.irs.gov/publications...>

So a child may receive scholarships which is part of support.  But it is NOT considered as the child paying for their own support, it is considered as a third party paying their support.

In most cases, in order for a child to claim his own exemption (and not be a dependent of the parents), the child must pay over 50% of his own support.  Because scholarships are considered as being paid by a third party, it is extremely unlikely that the student would have paid for over 50% of his own support.  Therefore, the child would be a dependent of his parents.



Definitions in the Tax Code usually only apply to that specific section.  It does NOT necessarily apply to other sections of the Tax Code, which may have different definitions.  Earned Income is one of those things.

For purposes of the Kiddie Tax, the Tax Code definition of "Earned Income" is in §1(g)(2)(A)(ii)(II), which points to §911(d)(2) for the definition.  Here is that definition of Earned Income (for purposes of the Kiddie Tax):

"The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered".  (It does go on to clarify a few details, but that does not change this definition).
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/1#g:">https://www.law.cornell.edu/uscode/text/26/1#g:</a>
<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/911#d">https://www.law.cornell.edu/uscode/text/26/911#d</...>

Scholarships are NOT "wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered", so they are subject to the Kiddie Tax.  The Instructions for Form 8615 (Kiddie Tax) repeat that, and specifically state that taxable scholarships are subject to Kiddie Tax.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/instructions/i8615#idm140023474969936">https://www.irs.gov/instructions/i8615#id...>

[maglib]

the support test for a qualifying child is the same support test so a child who provides over 50% of their own support refers back to the qualifying relative calculation support test that does include certain scholarships as income for support test and at same time.  It says at the same time scholarships are not included then says certain ones may be.
 The IRS has included fellowship and grants and certain scholarships as earned income for the EITC and for AOTC and for self employment income.    In same publication it says a scholarship is not support but then says it is in certain circumstances.  In general a scholarship is not earned income....   
We can agree to disagree but, I know that conversations with certain major company tax preparers are including it as earned income for support tests for dependent to meet greater than 50% support and I also know factually it has satisfied the IRS. High wealth individuals lose exemptions so it is better for student to claim themself.  They support it with scholarship declared as earned income, then take AOTC or other tax credits and reduce the kiddie tax for unearned income, and the earned income tax to deminimis amounts although parents tax rates are at caps, the entire effort is to reduce the kiddie taxes to the lower tax rate of the student.

[maglib]

It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants NOT reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

[TaxGuyBill]

I'm not sure where you are getting your information, but it seems like you are disagreeing with the Tax Code, which is the ultimate authority.  I have clearly shown you what the Tax Code says, and some IRS Publications and Instructions that echo what the Tax Code says.

If there are tax preparers not including scholarship for the Kiddie Tax, or counting scholarships as if the son/daughter is paying their own support, they are clearing doing it illegally, against what the Tax Code clearly says.

[maglib]

My son and us got audited and won with scholarship and other income being taxable income qualifying for over half his own support related to 2014 tax return.  I included this in the forum in 2015 or 2016, I believe TT changed program as we had to use competitor software to get it to work in past. He has taken his own exemption every year since then and got AOTC and even refundable portion. He has not paid kiddie tax on the amount as he reported it as earned income. This was at the advice of the employers partnership tax preparers.  Bottom line he has gotten a refund for 2014-2016 so far and only 1st year was it pulled and passed audit.  The tax preparer prepared  the standard argument for us. Basically, we reported the scholarship as 1099 and not during the education interview.  Many responses to OP's have told the OP to report the 1099 and w-2 as earned income and TT does not put that as unearned unless it's entered in the education interview. He does not get eitc as he's under 24 and a student.