How Kumon’s $100K Scholarship Could Trigger a Surprise Tax Bill
The culprit? The Dreaded Kiddie Tax.
In yesterday’s post, I wrote about Kumon, who received a full-ride scholarship to Claremont McKenna College, valued at nearly $100,000. That thrilled her mother, Dr. Tiger-Mom.
In the article, I explained that approximately $25,000 of the scholarship would be taxable, since room and board—along with other miscellaneous items such as transportation—are not considered qualified education expenses and therefore are not tax-free.
While $25,000 will be considered taxable income, the good news is that about 75% of her scholarship remains tax-free.
The bad news? That taxable scholarship will be hit with a special tax known as the Kiddie Tax, found in Internal Revenue Code §1(g). In this article, I’ll review what the Kiddie Tax is—and how much tax Kumon may actually have to pay.
What Is the Kiddie Tax?
The Kiddie Tax was originally created to prevent parents from shifting unearned income - like stock dividends - to their children to take advantage of the child’s lower tax brackets. In short, it was designed to prevent income tax avoidance by income shifting.
However, the Kiddie tax can inadvertently apply to taxable scholarships, even though Congress likely did not intend to “punish” families whose children earned scholarships that happen to be partially taxable.
The Kiddie tax can cause a portion of a child’s unearned income to be taxed at the parent’s marginal tax rate, instead of the child’s lower rate.
It is as if the IRS says,
“Since Kumon is a minor and did not earn this income through work, we will tax it as though it were Dr. Tiger-Mom’s income”.
The good news? The Kiddie Tax only kicks in once unearned income exceeds a certain threshold. For 2025, that threshold is $2,700.
In Kumon’s case, any taxable scholarship income over $2,700 will be taxed at her parent’s rate, let’s assume that is 37% for Dr. Tiger-Mom.
When Does the Kiddie Tax Apply?
The Kiddie Tax applies if all of the following conditions are met:
The child is under age 18, or a full-time student aged 19-23 who receives more than half of their support from parents (or others);
The child has at least one living parent;
The child does not file a joint return;
The child has more than $2,700 of unearned income in 2025.
Unearned incomes includes things like dividends, interest, capital gain, and taxable scholarship - basically, income that isn’t from working a job (like wages or self-employment)
How This Applies to Kumon
Kumon checks all the boxes:
She is a full time student under age 24
She receives support from her parent (Dr. Tiger-Mom)
She is single and does not file a joint return
And her taxable scholarship exceeds $2,700.
Conclusion: Kumon’s taxable scholarship is considered unearned income for Kiddie Tax purposes. Any amount over $2,700 will be taxed at her parent’s tax rate, 37% for Dr. Tiger-Mom.
How Kumon’s $25,000 Taxable Scholarship is Taxed
Let’s first look at the “normal” method of calculating her tax, just for comparison:
Method A: Regular Method (Child’s Tax Rates)
Determine Gross income
$25,000 - this is the taxable portion of Kumon’s $100,000 scholarship
the remaining $75,000 is tax-free since it was used for qualified expenses like tuition and related fees
Apply Standard deduction for dependents
The standard deduction is the portion of gross income that is not taxed, and it is calculated differently for dependents.
For dependents, the standard deduction is
The greater of
$1350 or
$450 + earned income up to the standard deduction for a single filer ($15000 in 2025).
How here’s the twist:
For standard deduction purposes, taxable scholarships are treated as earned income - even though they are unearned income for Kiddie Tax!
How crazy is that? Thanks to this rule, Kumon’s $25,000 taxable scholarship qualifies her for the full $15,000 standard deduction.
Determine taxable income
$25,000 (taxable scholarship) - $15,000 (standard deduction) = $10,000 taxable income.
Determine federal income tax
$10,000 x 10% marginal tax rate: $1,000
Note: This calculation would be correct if Kumon’s income were truly earned (like wages). However, for Kiddie Tax purposes, $25,000 is unearned income, and the Kiddies Tax is triggered.
Kumon’s Taxable Scholarship Under the Kiddie Tax
Now, let’s apply this Kiddie Tax rules, which compares two methods
Method A (child’s tax rates)
Method B (Kiddie Tax Method)
And requires the child to pay the higher of the two.
Method B: Kiddie Tax Method (Three-Tier “Ladder” System)
Think of the Kiddie Tax like a ladder:
The first rung: tax-free
The second rung: taxed at the child’s rate
The top rung: taxed at the parent’s rate (ouch!)
Let’s apply this to Kumon’s $10,000 of taxable income.
First $1,350 of unearned income => tax-free
Next $1,350 => taxed at Kumon’s 10% marginal rate = $135.
Remaining $7,300 => taxed at Dr. Tiger-Mom’s rate (37%) = $2701
Total tax Under Kiddie Tax = $135 + $2701 = $2836
Since Method B results in a higher tax liability than Method A ($1,000), Kumon is taxed $2,836 under the Kiddie Tax rules
Reference:
Internal Revenue Code §1(g)
IRS Publication 929 – Tax Rules for Children and Dependents
How to Minimize the Kiddie Tax
Now that we know Kumon is subject to the Kiddie tax, the next question is:
What can Dr. Tiger-Mom do about it?
Let’s look at a few tax planning tips that can help reduce the impact of this tax.
#1: Reduce Kiddie Tax with Capital Losses
While the Kiddie Tax can be an unpleasant surprise, a little tax planning can go a long way in softening the blow.
Because the Kiddie Tax applies to unearned income, Kumon may be able to reduce it by using a strategy called tax-loss harvesting.
In short, if Kumon sells investments like Tesla stock at a loss, those capital losses can offset the unearned income, including the taxable scholarship, upto $3,000 and lower her Kiddie Tax Bill.
Example:
Kumon sells Tesla stock and realizes a $3,000 capital loss
This reduces her new unearned income from $10,000 to $7,000.
The Kiddies tax applies at Dr. Tiger-Mom’s rate of 37%, so the tax savings is
$3,000 × 37% = $1,110 in savings
That’s real money back in their pocket - just from good timing and smart planning.
#2: Earned Income Can Break the Kiddie Tax
Suppose Kumon turns 18 and takes a summer internship at Google, earning $10,000.
If Kumon is able to use that earned income to cover more than half of her total support, she may no longer be subject to the Kiddie tax. One of the criteria for triggering the Kiddie Tax is that the child receives more than half of their support from parents (or others). If the child supports themselves with earned income, she may be exempt from the Kiddie Tax entirely.
By shifting this balance of financial support, Kumon may avoid having her unearned income taxed at her parent’s rate and instead be taxed entirely at her own (lower) rates.
Final Thoughts
For Dr. Tiger-Mom and Kumon, paying $2, 836 in taxes on a $100,000 scholarship is still a great deal - despite of the Kiddie ta. Kumon is receiving a world-class education at just a fraction of the actual cost due to her full-ride scholarship.
With a bit of smart planning, like harvesting capital losses or taking on a summer internship to earn income, they can reduce or even eliminate some of that Kiddie Tax Burden.
Just like Dr. Tiger-Mom, if your child is expected to have unearned income — whether from dividends, interest, or even taxable scholarships, don’t overlook the Kiddie Tax.
In 2025, the Kiddie Tax kicks in when unearned income exceeds $2,700.
So, if your child receives has investment income, be sure to factor the Kiddie Tax into your family’s tax planning strategy. A little foresight can go a long way in minimizing surprise taxes and keeping more of that hard-earned money in your family’s pocket!
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