Understanding the Kiddie Tax and How It Affects Your Scholarship Income
Are you a student with a scholarship income? If yes, you might need to understand the Kiddie Tax. It is a tax law that affects children up to the age of 18 and students up to the age of 24. Failure to comprehend the Kiddie Tax can lead to unexpected taxation and financial complications.
What is the Kiddie Tax?
The Kiddie Tax is a taxation law that was enacted in 1986 as a response to parents shifting their investment income to their children, who were in a lower tax bracket. The Kiddie Tax ensures that unearned income of children is not taxed at their parent’s tax rate, but at a higher rate. It applies to children who receive unearned income, such as dividends, interest, and capital gains. The law aims to prevent parents from reducing their taxes by shifting their income to their children.
How does the Kiddie Tax Affect Your Scholarship Income?
Scholarship income is considered unearned income, which means if you are a student with scholarship income, the Kiddie Tax may apply to you. The tax applies to the lesser of a student’s unearned income or their parents’ tax rate. For example, if a student under the age of 18 has $3,000 in unearned income from their scholarship, and their parent’s tax rate is 24%, the Kiddie Tax would apply to the $1,000 that exceeds the standard deduction.
Exemptions to the Kiddie Tax
The Kiddie Tax does not apply to all students with unearned income. If a student is 18 years or older or 24 years or younger and not a full-time student, the Kiddie Tax does not apply to them. Additionally, the tax does not apply to earned income, such as income from a part-time job.
Conclusion
Understanding the Kiddie Tax, even as a student, can help you avoid surprise tax bills and financial complications. If you receive scholarship income, you should know if it counts as unearned income and if the Kiddie Tax applies to you. Keep in mind that exemptions may apply, and seeking the advice of a tax professional can help clarify any doubts or concerns. Stay informed and prepared to make informed tax decisions that benefit you.
