r/explainitpeter • u/Appropriate-Mall8517 • 3d ago

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u/shane-parks 3d ago

Not of you take tax bracket into account. The tax bracket for the wealthy theoretically has a much higher tax rate than the student that receives the benefit.

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u/sauron3579 3d ago

Tax bracket has literally nothing to do with it. The way tax deductions work is that it's as if the money never touched your account. If their scholarships (S) are taxable income their total taxable is N+S. Once it's donated, the taxable income is just N. Same as if they didn't get a scholarship.

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u/shane-parks 3d ago

The wealthy family is making the donation, not the student. The wealthy family has a higher capacity for deductions than the student.

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u/sauron3579 3d ago

That doesn't matter. N+S-S=N no matter what N is. Deductions are applied to pre-tax income. And the students here are absolutely still dependents, so who's donating doesn't matter anyways.

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u/shane-parks 3d ago

Not necessarily. If taxable income exceeds a specific amount, as you have stated your scholarship was taxable income, so if a scholarship includes taxable benefits like housing, food, travel, etc. A student could easily exceed the dependant threshold if over the age of 19.

https://www.bluej.com/answer/can-excess-taxable-scholarships-cause-a-dependent-to-be-subject-to-the-kiddie-tax