Taxable Scholarship issue

[CPAontheRun]

I elected to have $13,224 of scholarship taxable to the dependent. ProConnect is zeroing out taxable income on the Form 1040 with the standard deduction. Which I agree with because Publication 501 states that taxable scholarships are earned income for determining the standard deduction. When going to the Form 8315 the $13,224 of scholarship is showing up as unearned income which I agree with because the instructions for Form 8615 state unearned income includes taxable scholarships. Here in lies the problem. I'm not receiving any tax at the parents rate on the unearned income because the child's taxable income is zero on line 4 of the Form 8615 and line 5 is also zero. Line 5 of Form 8615 states "If zero, stop; do not complete the rest of this form but do attach it to the child's return". Is that correct and the child will not owe any kiddie tax on the scholarship? Thanks

[IntuitSusanY1]

Yes, this is correct in this instance assuming the taxable scholarship you outline here is the only income on the dependent student's return.  

The weird twists of this hybrid income work exactly as you've describe - the standard deduction kicks in as discussed in Publication 501, but the kiddie tax relies on the total taxable income on the return, which in this case doesn't exist.

The Form 8615 recharacterizes the rate of tax, but only on income that is taxable to begin with.  It's a bit of an unusual twist of tax law where the taxpayer wins in the end!  





 

[CPAontheRun · Accepted solution]

Thank you for the help. It is greatly appreciated.