Kiddie Tax on Grad Fellowship Help!

[lil13]

Hey all,

I was lucky enough to receive a pretty large stipend for the next couple years. However, I seemed to run into a huge issue that will significantly ruin my income: the Kiddie Tax. Since I am under 24 and a full time student, and fellowships are considered "unearned income" for kiddie tax purposes, my fellowship will be taxed at a whooping 37%. 

I'm not even a dependent on my parent's tax forms!!! Has anyone else considered this/gotten out of this? I can't afford to pay 37% tax. Thanks!

[Boolakanaka]

See—https://tax.thomsonreuters.com/news/strategies-for-dealing-with-the-kiddie-tax-part-i/

[NeoOzymandias]

If you're not a dependent, then are you providing more than one-half of your own support (less this fellowship)?

[lil13]

2 hours ago, NeoOzymandias said:

If you're not a dependent, then are you providing more than one-half of your own support (less this fellowship)?

Sadly, it's a bit more complicated then that. The IRS says I qualify if I am "

A full-time student at least age 19 and under age 24 at the end of 2018 and didn’t have earned income that was more than half of your support."

So it's "earned income" that must exceed half the support. The fellowship is my entire support. And the fellowship is not considered earned income by the IRS, since I don't get a W2 form. So even though the fellowship is my only money to live off of it doesn't matter.

[Emily Roberts]

1) I want to affirm that this is a terrible policy and it very, very much sucks that it applies to you.

2) I have an article up now on this situation. I think you already know the content, though. I haven't found a way out of this retroactively.

3) If you can't afford to pay your tax bill, tell the IRS and set up a payment plan.

4) If you are not turning 24 until 2020, try to take at least one step to avoid the tax in 2019 (at the end of my article).

[lil13]

On 4/11/2019 at 12:38 PM, Emily Roberts said:

1) I want to affirm that this is a terrible policy and it very, very much sucks that it applies to you.

2) I have an article sn up now on this situation. I think you already know the content, though. I haven't found a way out of this retroactively.

3) If you can't afford to pay your tax bill, tell the IRS and set up a payment plan.

4) If you are not turning 24 until 2020, try to take at least one step to avoid the tax in 2019 (at the end of my article).

Thanks for this. Sadly, I am super young to be entering a PhD program, and won't be 24 till 2021. I don't want to delay my starting grad school for 2 more years, so I'm not sure how this going to work. There is a bit of confusion though: so apparently when taking the standard deduction, scholarships count as earned income? So while scholarships count as unearned income for the kiddie tax, I should be able to take the full standard deduction from my stipend (which is more like 12,000) and then only pay kiddie tax on the remaining part?

Another little question: the Form 8516 for Kiddie Tax refers to the person as a "child". However, I do not fit the IRS's definition of a "qualifying child", so how is that lack of consistency in language okay? Is there any way to get around it because of this lack of clear language that clearly does not follow their own definitions?

[Emily Roberts]

3 hours ago, lil13 said:

Thanks for this. Sadly, I am super young to be entering a PhD program, and won't be 24 till 2021. I don't want to delay my starting grad school for 2 more years, so I'm not sure how this going to work. There is a bit of confusion though: so apparently when taking the standard deduction, scholarships count as earned income? So while scholarships count as unearned income for the kiddie tax, I should be able to take the full standard deduction from my stipend (which is more like 12,000) and then only pay kiddie tax on the remaining part?

Another little question: the Form 8516 for Kiddie Tax refers to the person as a "child". However, I do not fit the IRS's definition of a "qualifying child", so how is that lack of consistency in language okay? Is there any way to get around it because of this lack of clear language that clearly does not follow their own definitions?

Yes, when calculating the standard deduction, taxable scholarships/fellowship are earned income, but for the Kiddie Tax (and all the other purposes I can think of) they are unearned income. Super confusing that they use the same terms, but clearly defined when reading about one topic or the other.

Yes, your Kiddie Tax will be calculated off of your taxable income, which is after you've subtracted the standard deduction. Page 4 of Form 8615's instructions (https://www.irs.gov/pub/irs-pdf/i8615.pdf) has the exact calculation.

While it is super infuriating that the Kiddie Tax applies at all in this situation, I don't think their use of the word "child" invalidates it. Page 1 of Form 8615's instructions state: "These rules also apply whether or not you’re a dependent." The Kiddie Tax first only applied to children up to age 14, but in increments that age has been increased to age 24. The name "Kiddie Tax" has even stuck, though self-sufficient graduate students do not deserve that moniker. But it's there due to the history of the tax policy.

You're certainly welcome to hire a CPA to see if you can get out of this for 2018 and how to avoid it in the future. I'm currently corresponding with another grad student who found he's subject to the Kiddie Tax. He is working with a CPA but they haven't come up with any workarounds.

As for future years, I think your best hope is to work with your program to receive W-2 (assistantship) pay for at least part of the year in 2019 and 2020. Perhaps they will be able to defer your fellowship to start in 2021 or the latter part of 2020.

[Teaching Faculty Wannabe]

@Emily Roberts I just found out about the Kiddie Tax because of this forum. This is horrifying, but good to know. I am 23 now, and will be starting graduate school in late August. So, this means that I will have only been a full-time student in 2019 for only a little over four months in 2019 (I did not attend school any other time during 2019). Does this mean that the Kiddie Tax doesn't apply to me for my 2019 tax return? And since I will be 24 in 2020, then I don't have to worry about the Kiddie Tax for the 2020 tax return?

[Emily Roberts]

On 4/14/2019 at 10:24 PM, IceCream & MatSci said:

@Emily Roberts I just found out about the Kiddie Tax because of this forum. This is horrifying, but good to know. I am 23 now, and will be starting graduate school in late August. So, this means that I will have only been a full-time student in 2019 for only a little over four months in 2019 (I did not attend school any other time during 2019). Does this mean that the Kiddie Tax doesn't apply to me for my 2019 tax return? And since I will be 24 in 2020, then I don't have to worry about the Kiddie Tax for the 2020 tax return?

The Kiddie Tax won't apply to you in 2020 but could potentially apply in 2019 as the definition of a student is to be enrolled in "some part of each of any 5 calendar months of the year" (Publication 501 p. 12). You'll have to look at the rest of the criteria to see if you are subject to it or not, which you can find the instructions for Form 8615. If you aren't in school right now though and are earning (e.g., W-2 income) a salary, there's a good chance that you will pass the "support test," but that will come down to your earned income in this part of the year vs. your living expenses for the year and educational expenses once you start grad school. (Also, the Kiddie Tax is only a concern for fellowship/training grant recipients, not RAs/TAs receiving W-2 pay... Just wanted to make sure that is clear since you didn't say where your funding will come from in the fall.)

[Teaching Faculty Wannabe]

On 4/15/2019 at 12:51 AM, Emily Roberts said:

The Kiddie Tax won't apply to you in 2020 but could potentially apply in 2019 as the definition of a student is to be enrolled in "some part of each of any 5 calendar months of the year" (Publication 501 p. 12). You'll have to look at the rest of the criteria to see if you are subject to it or not, which you can find in the instructions for Form 8615. If you aren't in school right now though and are earning (e.g., W-2 income) a salary, there's a good chance that you will pass the "support test," but that will come down to your earned income in this part of the year vs. your living expenses for the year and educational expenses once you start grad school. (Also, the Kiddie Tax is only a concern for fellowship/training grant recipients, not RAs/TAs receiving W-2 pay... Just wanted to make sure that is clear since you didn't say where your funding will come from in the fall.)

Thank you. I will only be receiving fellowship stipends my first year :(. I feel like this is so messed up since grad students make so little money already.