Tax Alerts

The kiddie tax and unearned income from scholarships

Every fall, students all over the country set off to attend various colleges and universities. With the rising cost of higher education, many of these students are looking forward to receiving some form of scholarships to pay a portion or, in some cases, all of their tuition. This article reviews how some of these scholarships might be considered taxable income to the student. With the law known as the Tax Cuts and Jobs Act (TCJA) signed into law in 2017, this income, which is subject to the “kiddie tax” rules, is taxed at estate and trust tax rates, which can quickly climb to as much as 37%.

Taxable scholarships

In many cases, scholarships are not taxable. In fact, most students do not need to fear paying any tax on scholarships and fellowship grants because they are excluded from gross income under Sec. 117 as long as they are used for qualified tuition and related expenses, have not been earmarked for other purposes, and go to a student who is a candidate for a degree at a qualified educational organization.  Qualified tuition and related expenses in this case include required tuition, fees, books, supplies, and equipment.

An expense that most people commonly assume to be included in the qualified tuition and related expenses list is room and board, but it is not. Any scholarship or fellowship grant that is used to pay for room and board, or something else that is not considered qualified tuition or a related expense, is taxable. In addition, a scholarship may also be taxable when the scholarship is earmarked for a non-qualifying purpose such as room and board or travel.  In these situations, the amount of the earmark is taxable.

To read the complete July 1, 2019, post from The Tax Advisor online click HERE or contact a Dugan & Lopatka professional at info@duganlopatka.com or (630) 665-4440 for more information or to address specific concerns.

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