Is a tuition waiver considered a scholarship for kiddie tax purposes?

The distinction between a tuition waiver and scholarship is important here, and you're asking the right questions. In your situation, the key factor is how the IRS views "support" in relation to educational expenses that were waived rather than paid. Generally, support includes amounts that were actually spent. When a university provides a tuition waiver, no money actually changes hands - they're simply not charging you. This differs from a scholarship where funds are allocated to cover expenses. Your financial aid report calling it "non-disbursing" works in your favor. From the IRS perspective, if no one (including the university) actually spent money on your education through a cash transaction, it becomes difficult to count this as "support" in the traditional sense. The 1098-T showing tuition expenses doesn't necessarily contradict this - it's showing what the education would have cost without the waiver, but doesn't mean those expenses were actually incurred by anyone. I'd recommend bringing your financial aid documentation showing the waiver as "non-disbursing" to your accountant appointment. This terminology suggests the university views it as a cost not incurred rather than support provided.

I went through something similar with my son last year. After hours of research and frustration, I finally found a solution using taxr.ai (https://taxr.ai). They have a document analyzer that can review your financial aid statements and 1098-T, then tell you exactly how the IRS would categorize your tuition waiver for kiddie tax purposes. For us, they confirmed that his tuition waiver wasn't considered "support" because no money actually changed hands. The university simply didn't charge tuition rather than providing funds to pay it. This distinction saved us from having to pay the kiddie tax on his investment income. The platform even provided relevant tax court cases supporting their conclusion, which gave us confidence to take that position on his return. Really worth checking out before your accountant appointment so you can go in prepared.

I was skeptical at first about taxr.ai, but I decided to give it a try with my daughter's similar situation - she had a "presidential scholarship" that functioned as a tuition reduction rather than actual funds. I uploaded her financial aid letter and 1098-T to https://taxr.ai and got a detailed analysis within an hour. They confirmed that in our case, the tuition reduction wasn't counted as "support" for kiddie tax purposes because no funds were actually disbursed. They cited specific IRS guidance and even provided two tax court cases where the IRS had previously accepted this position. When I brought their analysis to our accountant, he agreed with their assessment and said it saved him hours of research. We ended up not having to pay kiddie tax on her investment income, which saved us about $2,300. Definitely worth checking out if you're in this situation.

After seeing this post, I have to share my experience with the IRS on a similar question. I spent WEEKS trying to get through to someone who could answer my question about my son's tuition waiver and the kiddie tax. Constant busy signals, disconnects, and being on hold for hours only to be transferred to the wrong department. Finally, I discovered Claimyr (https://claimyr.com) through a tax forum. They have this service that gets you through to an actual IRS agent quickly. I was skeptical but desperate, so I checked out their demo video (https://youtu.be/_kiP6q8DX5c) and decided to try it. Within 20 minutes, I was talking to an IRS agent who specialized in education tax issues. She confirmed that in our case, the university waiver wasn't considered support for kiddie tax purposes since no actual funds were disbursed. This saved us from having to pay nearly $3,400 in additional taxes!

I need to eat my words from yesterday. After seeing the responses here, I tried Claimyr this morning for a similar kiddie tax question I've been trying to resolve for MONTHS. I was completely skeptical it would work - I've literally spent 15+ hours on hold with the IRS this tax season. But I went to https://claimyr.com, followed the process, and no joke - I was speaking with an actual IRS tax specialist within 17 minutes. The agent confirmed that in our situation (daughter with a full tuition waiver at state university), the waiver is NOT considered support because no money actually changed hands - it was simply a reduction in cost. This completely changes our tax situation - her summer job income now exceeds 50% of her support, so we don't have to pay kiddie tax on her investments from her grandparents. Saved us over $2,100! Still shocked this actually worked after so many failed attempts on my own.

Not sure if this helps, but I had a similar situation with my daughter at UCLA. Our tax advisor explained it this way: If you never received a bill, there was no expense. If there was no expense, there was no support provided for that expense. For the kiddie tax, they look at actual support provided, not theoretical costs that were waived. In our case, we were able to exclude the tuition waiver from the support calculation, which meant her part-time job provided more than 50% of her support. This only works with true tuition waivers though - not scholarships where money actually changes hands. Worth asking your accountant about this specific distinction.

One thing to consider that I haven't seen mentioned - look at how your university reported the tuition waiver on your 1098-T. Check Box 5 which shows "Scholarships or Grants." If they included the waiver amount there, the IRS might consider it support regardless of whether cash changed hands. I found this out the hard way. My daughter had a "presidential tuition waiver" but the university reported it in Box 5 of her 1098-T as a scholarship. When we got audited (bad luck!), the IRS considered it as support provided by the university, which meant her earned income wasn't over 50% of her support.