Kickstarter and dependent son in college

[Mikewithaquestion]

Hi - my dependant son raised money for a college film project through Kickstarter in tax year 2019. According to IRS Pub 501, if he's a dependant he doesn't have to file if his earned income was less than 12,200. It wasn't - only about $3,000 from Kickstarter pledges for the project (and his expenses for the project in 2019 were actually a bit more than that.) He also had an internship in 2019 and they gave him about $700 total for 11 days work plus provided lodging.

Does he need to file? The IRS Pub is pretty clear the answer is no, but Kickstarter makes it a bit confusing on their site. They talk in general about taxes and use examples of funding as low as $1,000 but don't go into cases like dependants, etc.

Thanks for any help on this.

[MaryK4]

Kickstarter funds are considered taxable income. but expenses related to the expense are deductible as self-employment income (Schedule C).  The big IRS issue is not the INCOME taxes but Self-Employment Tax (Social Security and Medicare) is due on net self-employment income over $400- but because the GROSS is more, to show the net business income, you would have to file the Schedule C to show expenses.  

[Mikewithaquestion]

@MaryK4  That's another good point that I could use clarification on. His is not a business, it's a senior college project that he had to raise funds for in order to rent equipment and hire actors, etc for his film. Does that cross the line between an individual raising money for a college project, and it becoming more of a short term sole proprietorship? Thanks again for replying.

[Hal_Al]

Kickstarter income is generally not earned income, so the $12,200 threshold does not apply.  Kickstarter money can be a variety of items for tax purposes, with a mishmash of opinions on how it should be reported.  If it is business income, the $400 threshold applies.  If it is "other income", such as hobby income, then there's a $1100 filing threshold, for dependents.

I'm of the opinion that this money is gifts, since it was only a college project. He does not need to report it at all. The only taxable income would any money left over, after expenses.

Even if it is business income,  he will owe no tax, as long as all the money was spent (deductible expenses) on the project.  But, he will have to file. Furthermore, even if it is business income,  and he shows a "profit",  there  is a "one time gig" exception on the self employment tax, but not income tax.  But the income is low enough no income tax would be due anyway.

[Mikewithaquestion]

Thanks - That is helpful. I think the gift definition is negated, though, by the fact there was an expectation of a reward (pledge x amount to back the project and get a yyy in return). I'll have to read up on that a bit.

[Mikewithaquestion]

Continuing this thread, still stuck. @MaryK4 

The Kickstarter website says "In general, in the US, funds raised on Kickstarter are considered income."

I am going through TurboTax and I entered my son's Kickstarter net pledge amount as Miscellaneous Income.

When I got to the Deductions part, there is no place to enter the expenses he had as a deduction, because every question in that session talks only about employment or job expenses. This was not a job, it was a college curriculum required project. 

Any idea where to enter the expenses in TurboTax for things that aren't a job or employment?

Thanks,

Mike

[VictoriaD75]

Unfortunately, unless you are claiming the Kickstarter funds as business income, there is no way to deduct the expenses from the income. Yes. The income is taxable. Kickstarter funds are typically used as startup business funds. Your scenario is unique. 

What was received in return for the donation? You mention it in the thread above. If donors did not receive a good or service in return, then you could classify as a gift. 

Be sure to enter this as Other Income so that it is not subject to self-employment taxes.

To enter this in TurboTax Online, follow the following steps:

1. Under Federal, click on Wages & Income
2. Expand the options in Less Common Income, and click Start/Revisit next to Miscellaneous Income
3. Next to Other reportable income, click Start/Revisit
4. Answer Yes to the question Any Other Taxable Income
5. Enter a description and the corresponding dollar amount and click Continue
6. Click Done

You will find this income reported on line 8 of Schedule 1 and carried over onto the 1040 on line 7a. This gets added to all other income on your return and taxed at the ordinary income rate for your filing status and income level.

[Hal_Al]

If  you enter this as Other Income, you will not be allowed any deductions, but  it is not subject to self-employment taxes (FICA _ social security & medicare tax).

If you enter it as self employment ("business") income, you can deduct expenses, but anything left over ("profit") is subject to both income tax and  self employment tax (about 14%).

Repeating: it could also be a gift. 

As VictoriaD75 said, we need to know more about the "deal". 

[Mikewithaquestion]

Thanks, this starts to make more sense now. Since this is all completely separate from my tax return and is my dependent son's college project, we are trying to determine if he needs to file a return.

The Kickstarter project was a senior year college film production needed for graduation. In order to rent a truck, some equipment, get student and occasional semi-professional actors, etc, he had to raise $3000 in pledges, which he did. The people who pledged get something tangible in return like a copy of the graphics used or a copy of the video or film backer credit it the titles, etc. So it's definitely not a gift.

It's also not a job, and there are no wages or W2. Total in was $3068 minus the Kickstarter fee, so the net was $2819, and that was the only "income" he had for 2019.

We filled out a return for him on TurboTax, using the steps you outlined below with $2819 as Miscellaneous Income. We did not enter any expenses (though he spent $3396 over the course of the project so took a loss.)

TurboTax has a big green "$0" for Federal Refund, I suppose because the standard deduction was greater than that. So it looks like he owes nothing. Would he still need to file?

Mike

[Mikewithaquestion]

UPDATE: I deleted the file and started over to make sure I had no leftover data on some worksheet somewhere. 

When I entered the $2819 as miscellaneous income, it calculated the standard deduction as $1100, I think since I can claim him as a dependent??  So it shows owing $171 in Federal tax. So I guess he needs to file.

What's a little confusing is that the 2019 IRS Pub 501 Table 2 says if a parent can claim him as a dependent (true), as a single dependent under age 65 and not blind, he does not have to file (because of unearned income less than $1100, earned income less than $12,200 and gross income less than to limits in the table). Apparently "Miscellaneous Income" doesn't fall under the definition of "earned income"? I see TurboTax put $0 in the Earned Income Worksheet.

OK, I think that solves it.

[JotikaT2]

I just wanted to provide you with some support as to why you need to file his return.

Since your son's gross income as a dependent is greater than $1,100 plus $350, he does need to file a tax return.  See the following for a detailed breakdown between earned and unearned income.

Filing taxes as a dependent

[Opus 17]

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@Mikewithaquestion wrote:

What's a little confusing is that the 2019 IRS Pub 501 Table 2 says if a parent can claim him as a dependent (true), as a single dependent under age 65 and not blind, he does not have to file (because of unearned income less than $1100, earned income less than $12,200 and gross income less than to limits in the table). Apparently "Miscellaneous Income" doesn't fall under the definition of "earned income"? I see TurboTax put $0 in the Earned Income Worksheet.

OK, I think that solves it.

---

Correct, misc income is considered "unearned" so it falls under the provisions of the "kiddie tax", which was originally meant to prevent parents from avoiding taxes on investments by putting them in their kids' names.

[Opus 17]

I just saw this and decided to butt in.

My overall take is 

a) generally, if you promise to produce goods or perform a service in return for the money, then you are self-employed (whether or not you also provide premiums to sponsors.)  In this case, he promised to make a movie, therefore he is self employed. 

b) however, one of the definitions of self-employment is that you are "engaged in an ongoing trade or business."  For example, someone who advertises as a wedding photographer and does it routinely is involved in an ongoing trade or business.  Someone who helps shoot a friends' wedding one time, is probably not engaged in an ongoing trade or business, even if they got paid that one time.

c) if you are engaged in an ongoing trade or business, you report the income on schedule C and you can deduct your business-related expenses.

d) if you are not engaged in an ongoing trade or business, you report misc other income, but you can't deduct expenses.

Because this was an educational activity, I think you have a good argument that, even though filmmaking is a business and your son promised to provide goods or services, you can treat this as other income instead of self-employment income, if that's what you prefer.  On the other hand, I don't think the IRS would object if it were reported as self-employment.  You can prepare a self-employment return for free using the FreeFile version of Turbotax as long as his total income is less than $36,000.

Whether you pay more kiddie tax on the gross as misc other income, or pay more SE tax on the net schedule C income, is something you would have to test. 

The FreeFile version of Turbotax is available for taxpayers with income up to $36,000 and military taxpayers with income up to $69,000, and includes all forms that are normally an upgrade charge in regular Turbotax. To use the FreeFile version, you must log into the FreeFile site and make a new account, you can't use your regular Turbotax account. (If your browser automatically logs you into the regular Turbotax site, you may need to clear your browser history then try again.)

https://freefile.intuit.com