College student has taxable income due to extra money from scholarships

[StevePipho25]

My daughter has Florida Prepaid and other scholarships and because of the extra money it is counted as taxable income.  However, when I try to fill out her tax form it only gives me the standard deduction of $1,100 instead on the income amount +$350 like it did last year.  As a result she would owe over $500 in taxes.  Last year when we filed, I did the exact same thing as this year.  Her 1040 lists "SCH" and income amount.  However her standard deduction was figured by using the income amount +$350.  Since she is claimed as a dependent on my taxes she is entitled to a standard deduction of the greater between $1100 or Income amount +$350.  This year Turbo Tax is not giving her the amount greater, which should result in her owing no taxes.  Is this some some of problem with this years release of Turbo Tax? or did I enter her income wrong somewhere?

[Opus 17]

I’m afraid you misunderstand the rules. The standard deduction for a child subject to the kiddie tax is the amount of earned income plus $350.  Scholarships are not earned income.  One of the provisions of the tax cuts and jobs act of 2018 was to simplify the kiddie tax, but it also ended up making more of students scholarship income subject to that tax.

[StevePipho25]

If that is the case then why did Turbo Tax do it that way last year?

[Opus 17]

I am unclear on the overall situation.  Also, apparently the recently passed "Secure" act dealing with retirement, also "fixed" some of the kiddie tax problem, and those changes are retroactive to 2019.  Turbotax may be updated over the weekend, so I would wait until Monday and start over on your child's return.

@Hal_Al  @dmertz would you like to comment?

In general, the kiddie tax always taxed a child's unearned income, and scholarships are always unearned income.  What changed in 2018 with the TCJA was the tax rate that was used, and what was changed again (and made retroactive) was the rate, not the rules about unearned vs. earned income.  So I don't know why your child's income would have been viewed as "earned" in 2018, without seeing your tax forms and reviewing the 2018 laws to refresh my memory.  Did you somehow have a schedule C for self-employment or was the scholarship reported in box 7 of a 1099-MISC?  Maybe one of the other experts has some insight.

The change in the kiddie tax rate will benefit you, even if the rules on unearned income are not changed, but you will need to wait until the recent law change is applied to the program. 

[dmertz]

When I make the exact same entries in 2019 TurboTax as I make in 2018 TurboTax, where income+$350 is greater than the dependent standard deduction, I see deduction of income+$350 on Form 1040.  I tested with SCH amounts of $1,000 and $2,000, with no other income and no above the line deductions so that the entire $1,000 or $2,000 appears as AGI.

I also tested with $701 of AGI in 2018 TurboTax and $751 in 2019 TurboTax and see deductions of $1,051 and $1,101, respectively.  With $699 or less of AGI in 2018 and $749 or less of AGI in 2019 I see deductions of $1,050 and $1,100, respectively.

Although I don't think it's relevant in this case, be aware that the standard deduction for the dependent is still ultimately limited to $12,000 for 2018 and $12,200 for 2019, even if income +$350 is more.

Since the question was about determining the standard deduction, I won't comment on the calculation of the kiddie tax.

[Hal_Al]

Scholarship income is treated as earned income for purposes of calculating the standard deduction. It is not earned income for other purposes (EIC or IRA contributions).

As such, it has to be entered on line 1 of form 1040 with the SCH notation.  If you enter it anywhere else (e.g line 8 of Schedule 1), it will be treated as other income (unearned).

In TurboTax, do not enter taxable scholarship in the income section.  Instead enter it at Deductions & Credits/ Education expenses.  That will get it to line 1 of the 1040.