Is scholarship income earned or unearned for Additional Child Tax Credit? Will $3500 work study + $3000 grant require filing?
Title: Is scholarship income earned or unearned for Additional Child Tax Credit? Will $3500 work study + $3000 grant require filing? 1 I'm trying to figure out if including my son's $2000 scholarship as taxable income would help us get more Additional Child Tax Credit. The question I have is whether this scholarship counts as earned income or unearned income? My son also made $3500 from work study last year. If we include the $2000 scholarship as taxable income, would he be required to file a tax return with $5500 total income? The reason I'm asking is that if it's considered earned income and he's not required to file a tax return, then his income won't be counted when calculating our Premium Tax Credit for health insurance through the marketplace. But if it's unearned income, his income would be included in our household income calculation, which might decrease our Premium Tax Credit by more than what we'd gain from the Additional Child Tax Credit. I want to make sure we're making the right decision financially for our 2025 taxes.
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Daniel Washington
8 The scholarship/grant question is a good one! For tax purposes, scholarships and grants are generally considered unearned income, not earned income. Only income from actual work (like your son's $3500 work-study) counts as earned income. As for the filing requirement, with $3500 in earned income (work-study) and $2000 in taxable scholarship (if you choose to report it as taxable), your son's total income would be $5500. For 2025, if he's a dependent, he would need to file if his earned income exceeds $14,350 OR if his unearned income exceeds $1,250. Since the $2000 scholarship (if taxable) would be unearned income and exceeds $1,250, he would be required to file. Regarding your Premium Tax Credit concern - you're thinking correctly. If he's required to file a return, his income would be included in your household income for Premium Tax Credit calculations, potentially reducing your credit amount.
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Daniel Washington
•12 Thanks for explaining this! I'm confused though - I thought scholarships used for qualified education expenses weren't taxable at all? Are you saying we have a choice whether to include it as taxable income? And if we do include it as taxable, would that help with the Additional Child Tax Credit somehow?
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Daniel Washington
•8 You're right that scholarships used for qualified education expenses (tuition, required fees, books) are generally not taxable. But if the scholarship is used for non-qualified expenses (room and board, for example), that portion would be taxable. Some families do choose to report some scholarship as taxable if it benefits them for tax credit purposes. For the Additional Child Tax Credit (ACTC), having more earned income can sometimes help qualify for a larger refundable portion of the Child Tax Credit. However, since scholarships are unearned income, including it as taxable income won't help with the ACTC calculation. It would only increase your taxable income without the benefit you're hoping for, while potentially reducing your Premium Tax Credit as you correctly noted.
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Daniel Washington
6 After dealing with a similar situation last year, I found a tool that was incredibly helpful - taxr.ai (https://taxr.ai). I uploaded my son's scholarship info and my tax documents, and it analyzed exactly how different reporting options would affect our Additional Child Tax Credit and Premium Tax Credit. The system showed me that in our case, treating part of the scholarship as taxable actually reduced our overall tax benefit because of exactly what you're concerned about - it decreased our Premium Tax Credit more than it increased our Child Tax Credit. The tool let me compare different scenarios side by side so I could see the exact dollar impact before making any decisions.
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Daniel Washington
•15 How does this work exactly? Do you have to enter all your income info again if you've already started using TurboTax or something similar?
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Daniel Washington
•19 I'm skeptical about these tax tools. Does it actually give you actionable advice or just generic information you could find on IRS.gov? And is it as accurate as consulting with a real tax professional?
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Daniel Washington
•6 You don't need to re-enter everything. You can just upload your existing tax PDF and it analyzes what you've already done. It saved me from manually calculating multiple scenarios to see which was better. The advice isn't generic at all - it's specific to your actual numbers. It's more like having a tax pro analyze your specific situation than reading general guidelines. In my case, it pointed out that treating $1,500 of my daughter's scholarship as taxable would increase our refund by $280 because of how it interacted with both credits. I verified this with my usual tax software and it was spot on.
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Daniel Washington
19 Just wanted to follow up about that taxr.ai site mentioned earlier. I was really skeptical but decided to try it with my daughter's scholarship situation which was similar to yours. The tool analyzed our returns and showed that in our specific case, we should NOT include her scholarship as taxable income because we'd lose about $430 in Premium Tax Credit while only gaining about $175 in Additional Child Tax Credit. It actually showed me the exact calculation of how the household income increase would affect our health insurance subsidies on a sliding scale. Saved me from making a costly mistake - I was about to report it as taxable thinking it would help with child tax credits but would have actually lost money overall. Definitely worth checking out if you're trying to optimize between these two credits.
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Daniel Washington
10 If you're having trouble getting clear answers from the IRS about this scholarship/tax credit question, you might want to try Claimyr (https://claimyr.com). I was stuck with a similar question about education credits vs. scholarships and kept getting disconnected after waiting on hold with the IRS for hours. Claimyr got me connected to an actual IRS agent in about 20 minutes who walked me through the specific rules for my situation. They have a demo video that shows how it works: https://youtu.be/_kiP6q8DX5c The agent clarified that for my son's situation, including the scholarship as taxable income actually hurt us more through Premium Tax Credit reduction than it helped with other credits. Having that official confirmation saved us from making an expensive mistake.
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Daniel Washington
•4 Wait, is this service just paying to skip the IRS phone line? How does that even work? The IRS phone system is absolutely maddening but I didn't know there was a way around it.
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Daniel Washington
•19 Sounds like a scam to me. Nobody can magically get you through to the IRS faster. I've spent hours on hold and eventually just gave up and guessed on my taxes. I seriously doubt this actually works.
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Daniel Washington
•10 It's not skipping the line exactly - they use technology that continuously redials and navigates the IRS phone tree until they get through, then they call you to connect you. I was skeptical too, but they connect you directly with the official IRS agents, not third-party advisors. No, it's not a scam - they don't ask for any personal tax info. They just get you connected to the real IRS. I tried calling directly for 3 days with no luck before using it. Was connected in 23 minutes and the IRS agent confirmed I'd reached the actual IRS. I honestly wish I'd known about this years ago instead of wasting days trying to get tax questions answered.
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Daniel Washington
19 I need to apologize to the Claimyr folks I called out earlier. After my frustration boiled over trying to get answers about my son's scholarship situation, I decided to try it as a last resort. It actually worked! Got connected to an IRS tax law specialist in about 30 minutes who explained exactly how scholarship income affects both the Additional Child Tax Credit and Premium Tax Credit calculations. The agent confirmed that reporting the scholarship as taxable would trigger a filing requirement, and since my son would then need to file, his income would definitely be included in our household income for Premium Tax Credit. She ran the numbers and in our specific case, we'd lose about $340 in healthcare subsidies while only gaining about $120 in child tax benefits. Really glad I got definitive answers instead of guessing.
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Daniel Washington
14 Something nobody's mentioned yet - your work-study income of $3500 IS earned income already! Work-study is treated as employment income because the student has to work for it. So that portion is definitely earned income and counts toward the earned income requirements for tax credits. Only the $2000 scholarship/grant would potentially be unearned income if it's taxable. Just wanted to make sure that was clear since it affects your calculations.
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Daniel Washington
•1 Oh that's an important point I hadn't considered! So are you saying that the $3500 work-study might already be enough earned income to maximize our Additional Child Tax Credit without needing to make the scholarship taxable?
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Daniel Washington
•14 It depends on your total tax situation and other income. The refundable portion of the Additional Child Tax Credit is calculated as 15% of earned income above $2,500, up to the maximum credit amount. So with $3,500 work-study, that's $1,000 above the $2,500 threshold, which would give you $150 in refundable credit (15% of $1,000). If you need more than $150 of the refundable portion, then you might consider other options, but making the scholarship taxable won't help since it's not earned income. And as others pointed out, it could hurt your Premium Tax Credit. Your best bet is to run the calculations both ways with actual tax software to see which approach gives your family the best overall result.
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Daniel Washington
3 Just a heads up - for 2025 the filing threshold for dependents with unearned income is actually $1,300, not $1,250 like someone mentioned above. But the point still stands - if you make the $2000 scholarship taxable, your son would need to file. Another thing to think about - if your son doesn't need to file but you're considering having him file anyway to get some withholding back, that ALSO makes his income count toward the household income for Premium Tax Credit. The rule is that household income includes income of anyone REQUIRED to file a return, not just anyone who does file.
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Daniel Washington
•22 Thanks for the correction on the threshold! Do you know if there's a way to calculate exactly how much including his income would reduce the Premium Tax Credit? I'm trying to figure out if it's worth it.
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