Granddaughter Penalized for her Mother's Tax Credit

[WearyTaxee]

I am using TurboTax for my granddaughter’s taxes.  She is 22 and a full-time graduate student, living independently of both parents.  She is working part-time, and using grants, loans and scholarships to finance her education.

Her mother works full time and is also a graduate student.  The mother received a 2025 “head of household” credit for a younger child and a continuing education credit for herself.  She did not claim her daughter in any way, but TurboTax is calculating a tax increase for the daughter, based on her mother’s credits (Form 8615).  The younger sibling had no income in 2025, so he has not filed a return.

How can I get around this penalty imposed on my granddaughter?

Thanks for any help. 

Weary Taxee

[MaryK4]

IRS Form 8615 Tax for Certain Children Who Have Unearned Income, calculates the "kiddie tax" on a child's unearned income (investments, dividends, interest) exceeding $2,700 for 2025. It applies to children under 18, or up to 24 if they are full-time students, who did not provide half their own support.  In 2025, if a student (aged 19–23) does not provide over 50% of their own support, their unearned income—which includes taxable scholarships and grants—over $2,700 is taxed at the parent's highest marginal rate.

The key to avoiding Form 8615 is showing that she provided more than half of her own support. 
 

[NCperson]

@WearyTaxee are you talking about the elder daughter's tax return? is the box "I can be claimed on some one else's tax return" checked? if so, that is the problem.

If she provides for less than 50% of her financial support, she CAN be claimed by her mother.  Frankly, because of the benefit of AOTC, it is normally in the best interest of the taxpayer (mother in this case) to claim that elder child, get AOTC and get the $500 other dependent credit

If she provides for more than 50% of her financial support, she CAN't be claimed by her mother and may be  eligible for AOTC. 

This is the worksheet to determine the 50%.  Page 16

https://www.irs.gov/pub/irs-pdf/p501.pdf

[WearyTaxee]

Thank so much, MaryK4.  The TurboTax question is worded "Did your earned income exceed half of your support?"  Her earned income did not, but she borrowed money to cover the shortfall.  I had answered "no" to this question.  Changing this to "yes" cleared out form 8615.  Was this the correct change?

[WearyTaxee]

Thank you, @NCperson.  I did not realize that (at 22) she could be claimed as dependent by her mom.  Her mom has not provided support for several years, so did not claim her.  I went back to the worksheet and answered "yes" to "could be claimed" and "no" to "was claimed".  With this, and the info from @MaryK4, I believe everything looks good.  Form 8615 is clear, and she is not longer paying extra tax.

So appreciate the community help!

[NCperson]

@WearyTaxee I suspect the daughter CAN be claimed by the Mom.  Use the worksheet in my prior post to determine.

22 year olds that are full time stuents are normally dependents of their parents.  To be a Qualified Child they must be 

1) under the age of 24 and a full time student

2) live with the taxpayer at least 6 months of the year (and living away at college still counts as living at home with the taxpayer)

3) providing less than 50% of their own support. 

did you consider AOTC? that tax credit is worth up to $2500.

[WearyTaxee]

Hello @NCperson, and thanks again. 

per "3) providing less than 50% of their own support."  Granddaughter has provided 100% of her own own support through part-time work, grant, loan and scholarship.  She also worked one year before starting grad school, so may also have used savings.

My granddaughter received the AOTC credit in 2023 for her senior year of college.  I found the Turbo question concerning this very confusing:

                       Claimed the Hope or American Opportunity Credit in a previous year

                       Check this if a parent claimed this ... (in fainter type)

I assume I was to check it in either case, so I checked it and provided the info that she had received AOTC once.

After answering the other questions, Turbo Tax said that she does not qualify for any educational credits.  I believe this is because she received a grants + a scholarship that exceeded her tuition costs.

Message says she does not qualify because

• Somebody else can claim Samantha as a dependent on their return
• There were no net qualified education expenses

I will revise her mom's return to see how much that affects mom's refund.

Thanks for all your help!

[NCperson]

@WearyTaxee , yeah, but you are determing that based on your way of looking at the world and not the IRS's way of looking at it.  You'd be surprised.  Best to complete the worksheet in the link I provided. 

For example, if it's just the 4 in the household, then  ince the eldest daughter is only deemed to be temporarily living away from home,  then 1/4 of the household costs of her parent's home is HER responsibility under the IRS formula.  Is she paying that? I suspect not!  So she is NOT paying 100% of her own support costs! look at line 6a/ 6b of the worksheet.  

It is normally to her benefit to be claimed by her parents ($500 tax credit).

Also, on the AOTC, just because Box 5 exceeds Box 1 doesn't mean there is no benefit.  "It depends"/

1) what is Box 1.

2) what is in Box 5? for the scholarships what is the name of each scholarship and is it considered "restricted" or "unrestriced" in nature.  For example, Pell Grants are always "unrestricted".

The restricted scholarships MUST be netted against the QEE (Box 1), but the unrestricted scholarships do not have to be - and THAT is what creates AOTC tax credits when Box 5 exceeds Box 1! 

[WearyTaxee]

Hello again, @NCperson.  I've had an unexpected visitor and several volunteer activities, so only got back to this today.  An amended return for my daughter yields an additional refund of $2,400 because it changes her status to HOH.  I also went through the worksheet you provided, but things are very murky as to whether my granddaughter is a qualified dependent because of support that my husband and I provided to both daughter and granddaughter in 2025.  It is also complicated by a taxable scholarship that exceeds tuition costs and raises my granddaughter's taxable income considerably.

I have learned a lot, and I really appreciate your help and advice.  

[NCperson]

@WearyTaxee you are trying to solve multiple issues at the same time and you'll need to be more specific.

You'll need to resolve the dependency requirements first.  

Is your daughter your dependent? if yes, your granddaughter CANNOT be your daughter's dependent.  Your daughter could not file HOH in that circumstance. 

Use this tool to determine a) is your daughter your dependent? b) is your granddaughter your dependent? c) is your granddaughter a dependent of her mother? run the tool three times, once to answer each question. 

once you resolve that please post back with the results.  Then we can tackle the granddaughter's scholarship situation. 

https://www.irs.gov/help/ita/whom-may-i-claim-as-a-dependent

[WearyTaxee]

Hello Again @NCperson .  The dependency issues are more complicated than I want to go into here, and having been through a gruesome audit for a very straight-forward and well-documented charitable contribution several years ago, I don't want to raise any questions or have to defend the support issue.  I am just happy that my granddaughter is not penalized for her mother's lower tax rate, an d plan to file her taxes as soon as she reviews and approves.

Thank you again for your gracious help! 

[AmeliesUncle]

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@WearyTaxee wrote:

The TurboTax question is worded "Did your earned income exceed half of your support?"  Her earned income did not, but she borrowed money to cover the shortfall.  I had answered "no" to this question.  Changing this to "yes" cleared out form 8615.  Was this the correct change?

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No, that should not have been changed (your original answer of "no" was correct).  Unfortunately, she is subject to the Kiddie Tax.  Dependency has nothing to do with that.