2018 Taxes, Stipend, Dependency and Kiddie Tax

[SmartParent]

Started a 2017 thread on this topic last year but things look like they change for the 2018 tax year.

There may be new wrinkle that makes the kiddie tax even worse!

I hope I am wrong, but what pieces I have been able to find are the following. However I have not been able to find any IRS documents updated for 2018 yet. So these are from various news and web postings.

1) Taxable scholarships are now taxed via the "kiddie tax" at the rate for estates and trusts not the parents rate!
Kiddie Taxable Unearned Income hasTax Rate
up to $2,550 is 10%
$2,551 to $9,150 is 24%
$9,151 to $12,500 is 35%
all over $12,501 is 37%

2) The 2018 standard deduction now does not care whether the income is earned or unearned which will allow one to deduct $12,000 regardless of source. (Have not been able to confirm from multiple sources.) In 2017, one had to have enough earned income to get the full deduction.

With the new tax code, it looks like there would be an even stronger desire for a recipient to be independent. However, given the IRS rules that forbid the use of scholarship money for establishing one's support, I am not sure how this can be done.

Please add additional information and IRS references as they become available.

[kbl2017]

I don't have references but we have a living stipend. The money we receive is not considered a scholarship it is considered stipend. They are categorized differently and can (at least for the 2016 tax year) be claimed towards establishing ones independence. I was paid via government stipends for two 16 week periods last year and that was all I made. My tax person (aka my brother who is an accountant) had no issues claiming me as independent.

Second, we are earning stipends because we are "working" full time as students. It is not in exchange for work but it is expected that you don't have another job so it's not like we're getting this for doing nothing. So even without the change in deduction you still could have deducted the $12000 as it is still earned income.

Another note, I was not taxed with kiddie tax during my freshman-junior year even when my parents claimed me as dependent, however that money was from working and internships not scholarships. Total earning were above the 37% marker so I guess I'm really still not sure how the kiddie tax part works but I do know that the stipend is not the same consideration as the scholarship. You also don't have to claim the scholarship portion on your students income just the living stipend.

[SmartParent]

What is the "living stipend" counted as? That is the big question.

A recap from the previous thread (including one of your posts):

It's 1099MISC income. That means it's not a scholarship and it's not earned income. No self employment tax. No qualifying for earned income credit. Taxed at whatever rate the filer is taxed at. Just like winning a lotto.

Additionally, I think that our stipend is considered taxable fellowship income. It won't require us to pay medicare or social security because it's not in relation to wadges and is not in return for working. Which they make very clear in all our paperwork.

The stipend is considered like a lottery winning essentially. The scholarship is not reported on the 1099 because it is paid directly to the school. Despite what SMART said, you are not considered an independent contractor, you are not self employed, and it is not considered earned income. If you were considered a contractor, they'd have to deduct the amount of time worked during your internship from your total commitment. In this way they can still maintain that it's an unpaid internship and the money you are receiving is simply for living expenses.

So the consensus view is that the stipend is unearned income and not subject to self employment taxes. Also if the recipient isn't independent it would be subject to the "kiddie tax" since all unearned income (Including the taxable portion of scholarships and lotto winnings) is subject to the "kiddie tax." (Although you implied you did not end up not having to pay it.)

There are two points of view with respect to the stipend, one is that it is a scholarship/fellowship and hence does not count towards making the student independent, no matter how spent. The other view is that it is not a scholarship and can be used towards support and and if appropriately spent would make the recipient independent. Once one provides over half their support from non-scholarship sources one is no longer subject to the "kiddie tax."

It is this latter question that I am hoping to ultimately clarify.

Guess I'll have to get a professional opinion at some point so I can back up our final filing decisions.

[CSMajor]

What is the "living stipend" counted as? That is the big question.

A recap from the previous thread (including one of your posts):

It's 1099MISC income. That means it's not a scholarship and it's not earned income. No self employment tax. No qualifying for earned income credit. Taxed at whatever rate the filer is taxed at. Just like winning a lotto.

Additionally, I think that our stipend is considered taxable fellowship income. It won't require us to pay medicare or social security because it's not in relation to wadges and is not in return for working. Which they make very clear in all our paperwork.

The stipend is considered like a lottery winning essentially. The scholarship is not reported on the 1099 because it is paid directly to the school. Despite what SMART said, you are not considered an independent contractor, you are not self employed, and it is not considered earned income. If you were considered a contractor, they'd have to deduct the amount of time worked during your internship from your total commitment. In this way they can still maintain that it's an unpaid internship and the money you are receiving is simply for living expenses.

So the consensus view is that the stipend is unearned income and not subject to self employment taxes. Also if the recipient isn't independent it would be subject to the "kiddie tax" since all unearned income (Including the taxable portion of scholarships and lotto winnings) is subject to the "kiddie tax." (Although you implied you did not end up not having to pay it.)

There are two points of view with respect to the stipend, one is that it is a scholarship/fellowship and hence does not count towards making the student independent, no matter how spent. The other view is that it is not a scholarship and can be used towards support and and if appropriately spent would make the recipient independent. Once one provides over half their support from non-scholarship sources one is no longer subject to the "kiddie tax."

It is this latter question that I am hoping to ultimately clarify.

Guess I'll have to get a professional opinion at some point so I can back up our final filing decisions.

Please let us know how it works out! I feel that the stipend shouldn't be counted as scholarship income since it is not necessarily to go towards school (It's supposed to go towards living). While it is a stipend and SMART stated that it is not in exchange for work -- I still don't see why it'd be counted as a scholarship. Either way, I'm glad that I get to file independent this year because 37% is steep!!

[SmartParent]

Please let us know how it works out! I feel that the stipend shouldn't be counted as scholarship income since it is not necessarily to go towards school (It's supposed to go towards living). While it is a stipend and SMART stated that it is not in exchange for work -- I still don't see why it'd be counted as a scholarship. Either way, I'm glad that I get to file independent this year because 37% is steep!!

If I may ask, under which rule to you get file as independent: age, marital status or support?

[CSMajor]

Please let us know how it works out! I feel that the stipend shouldn't be counted as scholarship income since it is not necessarily to go towards school (It's supposed to go towards living). While it is a stipend and SMART stated that it is not in exchange for work -- I still don't see why it'd be counted as a scholarship. Either way, I'm glad that I get to file independent this year because 37% is steep!!

If I may ask, under which rule to you get file as independent: age, marital status or support?

Support — I’ve had internships with private companies that bumped me above. My accountant also told me my stipend for sure counts towards independence. I have received scholarship money from my school though that was refunded directly to me so that doesn’t count and will be taxed differently, but the stipend isn’t considered a scholarship (it’s a stipend)

[SmartParent]

Support — I’ve had internships with private companies that bumped me above. My accountant also told me my stipend for sure counts towards independence. I have received scholarship money from my school though that was refunded directly to me so that doesn’t count and will be taxed differently, but the stipend isn’t considered a scholarship (it’s a stipend)

Thanks for the reply. I certainly want to think the stipend isn't a scholarship and counts towards support but the few references I have found seemed to imply that stipends (at least in many contexts) are synonymous with a scholarship and are therefore not support.

Guess I'll have to get some professional advice.

Another interesting tax question is "does the fact that all moneys have to be repaid if one drops out of the program impact the tax determination?"