What's the advantage of claiming children as dependents after age 18 (full time college students)?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
Topic Author
fortfun
Posts: 2952
Joined: Tue Apr 19, 2016 7:31 pm

What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by fortfun »

It seems like with the standard deduction doubling, and exemptions going away, most parents would be better served by not claiming their 18+ year old children. That would allow them to more easily qualify for the American Op Act, Lifetime Learning Credit, etc. Am I missing something?
123
Posts: 7769
Joined: Fri Oct 12, 2012 3:55 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by 123 »

The IRS rules for dependents apply whether you claim them or not. For example, on the 1040 it asks if the filer (or their spouse) "can" be claimed as a dependent not "are" or "will". The IRS has enough information from the current and past year(s) returns to identify situations where someone "forgets".
The closest helping hand is at the end of your own arm.
User avatar
gobel
Posts: 342
Joined: Mon Feb 08, 2021 4:50 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by gobel »

There're actually 3 settings:
  1. They aren't dependents
  2. They are dependents
    1. You claim them
    2. You don't claim them
You can't choose between 1 and 2 since that's based on who provides support, but you can choose between a and b if 2 applies. And you can certainly choose 2b and have them take the education credits if your AGI is too high. Before TCJA you'd give up an exemption, but for now that is not the case so there's no downside.

Then there's a different criteria for kiddie tax - ie kiddie tax may or may not apply in all 3 cases above.
newacct
Posts: 100
Joined: Thu Feb 23, 2012 2:03 am

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by newacct »

gobel wrote: Tue Sep 14, 2021 12:23 pm Before TCJA you'd give up an exemption, but for now that is not the case so there's no downside.
That's not true. There is now a $500 tax credit for claiming a dependent.
User avatar
Topic Author
fortfun
Posts: 2952
Joined: Tue Apr 19, 2016 7:31 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by fortfun »

gobel wrote: Tue Sep 14, 2021 12:23 pm There're actually 3 settings:
  1. They aren't dependents
  2. They are dependents
    1. You claim them
    2. You don't claim them
You can't choose between 1 and 2 since that's based on who provides support, but you can choose between a and b if 2 applies. And you can certainly choose 2b and have them take the education credits if your AGI is too high. Before TCJA you'd give up an exemption, but for now that is not the case so there's no downside.

Then there's a different criteria for kiddie tax - ie kiddie tax may or may not apply in all 3 cases above.
Thanks Gobel. So it appears that many 18-24 year old college students might be better served by not having their parents claims them (and their parents would be better off too i.e. saving some money on tuition payments). Also, what's the kiddie tax that you are referring to?
Thanks!
FortFun
Last edited by fortfun on Tue Sep 14, 2021 1:30 pm, edited 1 time in total.
User avatar
Topic Author
fortfun
Posts: 2952
Joined: Tue Apr 19, 2016 7:31 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by fortfun »

newacct wrote: Tue Sep 14, 2021 12:27 pm
gobel wrote: Tue Sep 14, 2021 12:23 pm Before TCJA you'd give up an exemption, but for now that is not the case so there's no downside.
That's not true. There is now a $500 tax credit for claiming a dependent.
Even 18-26?
User avatar
gobel
Posts: 342
Joined: Mon Feb 08, 2021 4:50 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by gobel »

fortfun wrote: Tue Sep 14, 2021 12:29 pm
newacct wrote: Tue Sep 14, 2021 12:27 pm
gobel wrote: Tue Sep 14, 2021 12:23 pm Before TCJA you'd give up an exemption, but for now that is not the case so there's no downside.
That's not true. There is now a $500 tax credit for claiming a dependent.
Even 18-26?
haha, yes he's right. I was gonna put "almost" no downside, then decided to live dangerously and see what happens. The $500 credit would be allowed for an 18yo dependent if you claimed them and your income was below 200/400k.

Kiddie tax is when your kid has unearned income over a certain amount ($2200) and gets taxed at the parents' rate. There's a form 8615 for that, or under certain circumstances you can use 8814. Unearned income is like interest, dividends, capital gains, taxable SS, inherited IRA distributions, unemployment, etc.
User avatar
Topic Author
fortfun
Posts: 2952
Joined: Tue Apr 19, 2016 7:31 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by fortfun »

123 wrote: Tue Sep 14, 2021 12:11 pm The IRS rules for dependents apply whether you claim them or not. For example, on the 1040 it asks if the filer (or their spouse) "can" be claimed as a dependent not "are" or "will". The IRS has enough information from the current and past year(s) returns to identify situations where someone "forgets".
So does this mean that a 23 year old full time college student could not qualify for the American Opp Act since their parents could claim them as dependents, and their income would be too high?
Thanks!
User avatar
Topic Author
fortfun
Posts: 2952
Joined: Tue Apr 19, 2016 7:31 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by fortfun »

gobel wrote: Tue Sep 14, 2021 12:47 pm
fortfun wrote: Tue Sep 14, 2021 12:29 pm
newacct wrote: Tue Sep 14, 2021 12:27 pm
gobel wrote: Tue Sep 14, 2021 12:23 pm Before TCJA you'd give up an exemption, but for now that is not the case so there's no downside.
That's not true. There is now a $500 tax credit for claiming a dependent.
Even 18-26?
haha, yes he's right. I was gonna put "almost" no downside, then decided to live dangerously and see what happens. The $500 credit would be allowed for an 18yo dependent if you claimed them and your income was below 200/400k.

Kiddie tax is when your kid has unearned income over a certain amount ($2200) and gets taxed at the parents' rate. There's a form 8615 for that, or under certain circumstances you can use 8814. Unearned income is like interest, dividends, capital gains, taxable SS, inherited IRA distributions, unemployment, etc.
The 2,500 american opp act would out weigh the 500 tax credit. Could a full time 23 year student qualify for that if their parents didn't claim them?
Thanks!
secondcor521
Posts: 172
Joined: Wed Sep 10, 2014 4:11 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by secondcor521 »

fortfun wrote: Tue Sep 14, 2021 1:01 pm
gobel wrote: Tue Sep 14, 2021 12:47 pm
fortfun wrote: Tue Sep 14, 2021 12:29 pm
newacct wrote: Tue Sep 14, 2021 12:27 pm
gobel wrote: Tue Sep 14, 2021 12:23 pm Before TCJA you'd give up an exemption, but for now that is not the case so there's no downside.
That's not true. There is now a $500 tax credit for claiming a dependent.
Even 18-26?
haha, yes he's right. I was gonna put "almost" no downside, then decided to live dangerously and see what happens. The $500 credit would be allowed for an 18yo dependent if you claimed them and your income was below 200/400k.

Kiddie tax is when your kid has unearned income over a certain amount ($2200) and gets taxed at the parents' rate. There's a form 8615 for that, or under certain circumstances you can use 8814. Unearned income is like interest, dividends, capital gains, taxable SS, inherited IRA distributions, unemployment, etc.
The 2,500 american opp act would out weigh the 500 tax credit. Could a full time 23 year student qualify for that if their parents didn't claim them?
Thanks!
Yes, they could, assuming they otherwise qualified (there are a number of qualifications for the AOTC, but most plain vanilla college students generally find it easy to meet most of them). See instructions for Form 8863 page 2.

Note that the AOTC is different from a number of tax items. For the AOTC, it's just whether the parents *did* claim the student. For many other tax items, it's whether the parent *could have* claimed the student. So one needs to be careful and check the details in order to be compliant. (Yes, I wish the tax code were more consistent, but unfortunately it isn't.)
HereToLearn
Posts: 848
Joined: Sat Mar 17, 2018 5:53 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by HereToLearn »

fortfun wrote: Tue Sep 14, 2021 1:01 pm
gobel wrote: Tue Sep 14, 2021 12:47 pm
fortfun wrote: Tue Sep 14, 2021 12:29 pm
newacct wrote: Tue Sep 14, 2021 12:27 pm
gobel wrote: Tue Sep 14, 2021 12:23 pm Before TCJA you'd give up an exemption, but for now that is not the case so there's no downside.
That's not true. There is now a $500 tax credit for claiming a dependent.
Even 18-26?
haha, yes he's right. I was gonna put "almost" no downside, then decided to live dangerously and see what happens. The $500 credit would be allowed for an 18yo dependent if you claimed them and your income was below 200/400k.

Kiddie tax is when your kid has unearned income over a certain amount ($2200) and gets taxed at the parents' rate. There's a form 8615 for that, or under certain circumstances you can use 8814. Unearned income is like interest, dividends, capital gains, taxable SS, inherited IRA distributions, unemployment, etc.
The 2,500 american opp act would out weigh the 500 tax credit. Could a full time 23 year student qualify for that if their parents didn't claim them?
Thanks!
Yes, however only $1000 of the AOTC is refundable, so if the F/T student does not have any federal tax liability, he will not receive the full $2500.

To add to the list of situations where Kiddie Tax applies: fellowship awards. My son received summer research stipends and these amounts had to be reported as unearned income and subject to the Kiddie Tax.
User avatar
dodecahedron
Posts: 5798
Joined: Tue Nov 12, 2013 12:28 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by dodecahedron »

This is highly variable and complicated depending on the AGI/MAGI of the parents.

For low and moderate income families, claiming a full-time college student under 24 whose primary permanent residence is with the parents, can entitle the parents to claim Earned Income Credit. That can potentially be worth more than even the American Opportunity Credit. In some cases, even non-dependent college students can be claimed by their parents for Earned Income Credit.

Also, claiming college dependents can increase Premium Tax Credits for ACA policies covering one or more household members.
User avatar
Topic Author
fortfun
Posts: 2952
Joined: Tue Apr 19, 2016 7:31 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by fortfun »

dodecahedron wrote: Tue Sep 14, 2021 1:24 pm This is highly variable and complicated depending on the AGI/MAGI of the parents.

For low and moderate income families, claiming a full-time college student under 24 whose primary permanent residence is with the parents, can entitle the parents to claim Earned Income Credit. That can potentially be worth more than even the American Opportunity Credit. In some cases, even non-dependent college students can be claimed by their parents for Earned Income Credit.

Also, claiming college dependents can increase Premium Tax Credits for ACA policies covering one or more household members.
Ughh, very complicated. Is there a good blog to follow where someone explains this stuff? Much appreciated!
User avatar
LadyGeek
Site Admin
Posts: 75729
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by LadyGeek »

fortfun wrote: Tue Sep 14, 2021 12:04 pm It seems like with the standard deduction doubling, and exemptions going away, most parents would be better served by not claiming their 18+ year old children. That would allow them to more easily qualify for the American Op Act, Lifetime Learning Credit, etc. Am I missing something?
I assume you're referring to current law, which is the Tax Cut and Jobs Act (Tax Reform | Internal Revenue Service).
gobel wrote: Tue Sep 14, 2021 12:47 pm Kiddie tax is when your kid has unearned income over a certain amount ($2200) and gets taxed at the parents' rate. There's a form 8615 for that, or under certain circumstances you can use 8814. Unearned income is like interest, dividends, capital gains, taxable SS, inherited IRA distributions, unemployment, etc.
The wiki has some background info: Kiddie tax

We also have a new version under review. You might find this version more helpful. See: Wiki - Kiddie tax update
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
dodecahedron
Posts: 5798
Joined: Tue Nov 12, 2013 12:28 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by dodecahedron »

fortfun wrote: Tue Sep 14, 2021 1:29 pm
dodecahedron wrote: Tue Sep 14, 2021 1:24 pm This is highly variable and complicated depending on the AGI/MAGI of the parents.

For low and moderate income families, claiming a full-time college student under 24 whose primary permanent residence is with the parents, can entitle the parents to claim Earned Income Credit. That can potentially be worth more than even the American Opportunity Credit. In some cases, even non-dependent college students can be claimed by their parents for Earned Income Credit.

Also, claiming college dependents can increase Premium Tax Credits for ACA policies covering one or more household members.
Ughh, very complicated. Is there a good blog to follow where someone explains this stuff? Much appreciated!
Unfortunately, no easy substitutes for years of widely reading plus actual experience dealing with assisting a wide variety of families in different circumstances (on top of which, tax laws are constantly changing.) Premium Tax Credits, in particular, are location-dependent since different regions have different menus of ACA policies available with potentially a huge range of baseline "Second Lowest Cost Silver Plan" premiums on offer.
User avatar
dodecahedron
Posts: 5798
Joined: Tue Nov 12, 2013 12:28 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by dodecahedron »

secondcor521 wrote: Tue Sep 14, 2021 1:13 pm
fortfun wrote: Tue Sep 14, 2021 1:01 pm
gobel wrote: Tue Sep 14, 2021 12:47 pm
fortfun wrote: Tue Sep 14, 2021 12:29 pm
newacct wrote: Tue Sep 14, 2021 12:27 pm

That's not true. There is now a $500 tax credit for claiming a dependent.
Even 18-26?
haha, yes he's right. I was gonna put "almost" no downside, then decided to live dangerously and see what happens. The $500 credit would be allowed for an 18yo dependent if you claimed them and your income was below 200/400k.

Kiddie tax is when your kid has unearned income over a certain amount ($2200) and gets taxed at the parents' rate. There's a form 8615 for that, or under certain circumstances you can use 8814. Unearned income is like interest, dividends, capital gains, taxable SS, inherited IRA distributions, unemployment, etc.
The 2,500 american opp act would out weigh the 500 tax credit. Could a full time 23 year student qualify for that if their parents didn't claim them?
Thanks!
Yes, they could, assuming they otherwise qualified (there are a number of qualifications for the AOTC, but most plain vanilla college students generally find it easy to meet most of them). See instructions for Form 8863 page 2.

Note that the AOTC is different from a number of tax items. For the AOTC, it's just whether the parents *did* claim the student. For many other tax items, it's whether the parent *could have* claimed the student. So one needs to be careful and check the details in order to be compliant. (Yes, I wish the tax code were more consistent, but unfortunately it isn't.)
Even if not claimed by their parents, most college students under age 24 qualify only for the NON-refundable portion of the American Opportunity Credit. (For F/T college student under 24, the refundable portion is only available if the student provides over half their own support out of the student's own EARNED income.

So even if the student is providing more than half their own support, e.g., from their personal savings or from unemployment benefits or investment income from a trust fund or whatever), they can't claim the refundable portion. (See more details on pages 21-22 of IRS Pub 970, Tax Benefits for Education.)

Such a student COULD still claim the nonrefundable portion of the AOTC (or, alternatively, the Lifetime Learning Credit, which is entirely nonrefundable), but that does no good whatsoever unless the student has some actual tax liability to offset.

So, for example, 15 years ago, when my oldest was in college, our income was too high to claim either AOTC or LLC. She was our dependent but we chose not to claim her. (Under the laws at the time, we were also phased out from even getting to claim a dependent exemption for her.) We did not claim her on her return, but she obediently checked the box on her return that she *could* be claimed as a dependent. In particular, she was not providing more than half of her own support of out of her earned income (or out of any of her income, for that matter.) So she did not qualify for the refund portion of AOTC. But she did have a substantial amount of tax liability, so she could at least claim the nonrefundable portion of AOTC (or, in her case, the Lifetime Learning Credit, which worked out even better for her.)

Nowadays, it is rarer for a college student to have much tax liability (because the standard deduction is so big) so the nonrefundable part of the education credit is often not helpful to them, though it certainly could be, particularly if the student has kiddie tax liability, which could even arise from taxable scholarships. (Yes, to most people's surprise, sometimes part or all of a scholarship can be taxable. And it is generally not considered "Earned Income" by the IRS.)
secondcor521
Posts: 172
Joined: Wed Sep 10, 2014 4:11 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by secondcor521 »

dodecahedron wrote: Tue Sep 14, 2021 4:26 pm
secondcor521 wrote: Tue Sep 14, 2021 1:13 pm
fortfun wrote: Tue Sep 14, 2021 1:01 pm
gobel wrote: Tue Sep 14, 2021 12:47 pm
fortfun wrote: Tue Sep 14, 2021 12:29 pm

Even 18-26?
haha, yes he's right. I was gonna put "almost" no downside, then decided to live dangerously and see what happens. The $500 credit would be allowed for an 18yo dependent if you claimed them and your income was below 200/400k.

Kiddie tax is when your kid has unearned income over a certain amount ($2200) and gets taxed at the parents' rate. There's a form 8615 for that, or under certain circumstances you can use 8814. Unearned income is like interest, dividends, capital gains, taxable SS, inherited IRA distributions, unemployment, etc.
The 2,500 american opp act would out weigh the 500 tax credit. Could a full time 23 year student qualify for that if their parents didn't claim them?
Thanks!
Yes, they could, assuming they otherwise qualified (there are a number of qualifications for the AOTC, but most plain vanilla college students generally find it easy to meet most of them). See instructions for Form 8863 page 2.

Note that the AOTC is different from a number of tax items. For the AOTC, it's just whether the parents *did* claim the student. For many other tax items, it's whether the parent *could have* claimed the student. So one needs to be careful and check the details in order to be compliant. (Yes, I wish the tax code were more consistent, but unfortunately it isn't.)
Even if not claimed by their parents, most college students under age 24 qualify only for the NON-refundable portion of the American Opportunity Credit. (For F/T college student under 24, the refundable portion is only available if the student provides over half their own support out of the student's own EARNED income.

So even if the student is providing more than half their own support, e.g., from their personal savings or from unemployment benefits or investment income from a trust fund or whatever), they can't claim the refundable portion. (See more details on pages 21-22 of IRS Pub 970, Tax Benefits for Education.)

Such a student COULD still claim the nonrefundable portion of the AOTC (or, alternatively, the Lifetime Learning Credit, which is entirely nonrefundable), but that does no good whatsoever unless the student has some actual tax liability to offset.

So, for example, 15 years ago, when my oldest was in college, our income was too high to claim either AOTC or LLC. She was our dependent but we chose not to claim her. (Under the laws at the time, we were also phased out from even getting to claim a dependent exemption for her.) We did not claim her on her return, but she obediently checked the box on her return that she *could* be claimed as a dependent. In particular, she was not providing more than half of her own support of out of her earned income (or out of any of her income, for that matter.) So she did not qualify for the refund portion of AOTC. But she did have a substantial amount of tax liability, so she could at least claim the nonrefundable portion of AOTC (or, in her case, the Lifetime Learning Credit, which worked out even better for her.)

Nowadays, it is rarer for a college student to have much tax liability (because the standard deduction is so big) so the nonrefundable part of the education credit is often not helpful to them, though it certainly could be, particularly if the student has kiddie tax liability, which could even arise from taxable scholarships. (Yes, to most people's surprise, sometimes part or all of a scholarship can be taxable. And it is generally not considered "Earned Income" by the IRS.)
I generally agree with everything you wrote. Note that nothing that I wrote disagrees with what you wrote - I was merely limiting my statements to whether a tax dependent student could qualify for the AOTC, not whether they would be able to max out both portions of the credit.

And you're right, the refundable portion of AOTC is challenging for a college student to get, so that's something that needs to be weighed. If one is tax planning throughout the year, one might be able to generate enough tax liability to be able to take advantage of the refundable portion of AOTC. For example, making scholarships taxable, or taking nonqualified distributions from a 529, or doing a Roth conversion (admittedly unlikely for a traditional student), or working a job are all things that might generate enough income to generate enough liability to take advantage of both portions of the credit. If one is exceptionally careful, one can in fact dial such things in to where, for example, a non-qualified distribution from a 529 becomes completely tax free (at least at the federal level).
User avatar
gobel
Posts: 342
Joined: Mon Feb 08, 2021 4:50 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by gobel »

fortfun wrote: Tue Sep 14, 2021 1:29 pm
dodecahedron wrote: Tue Sep 14, 2021 1:24 pm This is highly variable and complicated depending on the AGI/MAGI of the parents.

For low and moderate income families, claiming a full-time college student under 24 whose primary permanent residence is with the parents, can entitle the parents to claim Earned Income Credit. That can potentially be worth more than even the American Opportunity Credit. In some cases, even non-dependent college students can be claimed by their parents for Earned Income Credit.

Also, claiming college dependents can increase Premium Tax Credits for ACA policies covering one or more household members.
Ughh, very complicated. Is there a good blog to follow where someone explains this stuff? Much appreciated!
If you are being phased out of AOTC (AGI 160k), then these 2 things probably don't even apply.

But there do seem to be many levels to this topic, and a lot of threads that talk about it. Many threads focus on shifting LTCG to the kid to generate a tax liability, which is then offset by the AOTC credit. If the kid is already earning money, that would be even easier. Based on what I've read here

Level 1: take advantage of $2200 tax free LTCG by selling some stock in kid's name (staying below kiddie tax)
Level 2: take advantage of $2200 tax free LTCG + $2500 AOTC credit by not claiming them as a dependent and selling a lot more stock in kid's name (to trigger $2500 kiddie tax)
Level 3: take advantage of full 12.55k standard deduction by having kid support themselves at least 50% from unearned income, eg from stock sales or 529
Level 4: avoid kiddie tax altogether and take advantage of 0% LTCG bracket by having kid earn at least 50% of support

eg. say the kid has a lot of LTCG stock (and parents are in the 15% LTCG bracket). Then kid
Level 1: can take $2200 of LTCG with no tax
Level 2: can take $2200+16666 of LTCG with no tax
Level 3: can take $12550+16666 of LTCG with no tax
Level 4: (assume earned income is 25k) can take $27950+8033 of LTCG with no tax

Note, at some point the kid will probably have interest, divs, and part-time earned income too, so you would want to use tax software to calculate how much LTCG to take each year.
User avatar
dodecahedron
Posts: 5798
Joined: Tue Nov 12, 2013 12:28 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by dodecahedron »

secondcor521 wrote: Tue Sep 14, 2021 4:51 pm If one is tax planning throughout the year, one might be able to generate enough tax liability to be able to take advantage of the nonrefundable portion of AOTC. For example, making scholarships taxable, or taking nonqualified distributions from a 529, or doing a Roth conversion (admittedly unlikely for a traditional student), or working a job are all things that might generate enough income to generate enough liability to take advantage of both portions of the credit. If one is exceptionally careful, one can in fact dial such things in to where, for example, a non-qualified distribution from a 529 becomes completely tax free (at least at the federal level).
This is complicated. You only need tax liability to take advantage of the NONrefundable portion of the credit, which is why I edited add "non" to what you wrote and highlighted in red above.

The refundable portion does not require any tax liability to take advantage of, but it DOES require sufficient earnings by the student to provide more than half of their support unless the student is over 24 (or both parents are dead or a few other rare exceptions).

And yes, if planned for carefully, it can sometimes be engineered to happen. But it is often hard to predict. Last year, there were a bunch of unpredictably non-dependent students (due to the students qualifying for large amounts of COVID unemployment) and they potentially faced significant kiddie tax on their unemployment but at the last minute Congress changed the law (in March!) to make all or most of that unemployment tax-free, thereby unexpectedly eliminating a lot of student tax liability at the last minute.
BernardShakey
Posts: 378
Joined: Tue Jun 25, 2019 10:52 pm
Location: CA

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by BernardShakey »

dodecahedron wrote: Tue Sep 14, 2021 4:26 pm
secondcor521 wrote: Tue Sep 14, 2021 1:13 pm
fortfun wrote: Tue Sep 14, 2021 1:01 pm
gobel wrote: Tue Sep 14, 2021 12:47 pm
fortfun wrote: Tue Sep 14, 2021 12:29 pm

Even 18-26?
haha, yes he's right. I was gonna put "almost" no downside, then decided to live dangerously and see what happens. The $500 credit would be allowed for an 18yo dependent if you claimed them and your income was below 200/400k.

Kiddie tax is when your kid has unearned income over a certain amount ($2200) and gets taxed at the parents' rate. There's a form 8615 for that, or under certain circumstances you can use 8814. Unearned income is like interest, dividends, capital gains, taxable SS, inherited IRA distributions, unemployment, etc.
The 2,500 american opp act would out weigh the 500 tax credit. Could a full time 23 year student qualify for that if their parents didn't claim them?
Thanks!
Yes, they could, assuming they otherwise qualified (there are a number of qualifications for the AOTC, but most plain vanilla college students generally find it easy to meet most of them). See instructions for Form 8863 page 2.

Note that the AOTC is different from a number of tax items. For the AOTC, it's just whether the parents *did* claim the student. For many other tax items, it's whether the parent *could have* claimed the student. So one needs to be careful and check the details in order to be compliant. (Yes, I wish the tax code were more consistent, but unfortunately it isn't.)
Even if not claimed by their parents, most college students under age 24 qualify only for the NON-refundable portion of the American Opportunity Credit. (For F/T college student under 24, the refundable portion is only available if the student provides over half their own support out of the student's own EARNED income.

So even if the student is providing more than half their own support, e.g., from their personal savings or from unemployment benefits or investment income from a trust fund or whatever), they can't claim the refundable portion. (See more details on pages 21-22 of IRS Pub 970, Tax Benefits for Education.)

Such a student COULD still claim the nonrefundable portion of the AOTC (or, alternatively, the Lifetime Learning Credit, which is entirely nonrefundable), but that does no good whatsoever unless the student has some actual tax liability to offset.

So, for example, 15 years ago, when my oldest was in college, our income was too high to claim either AOTC or LLC. She was our dependent but we chose not to claim her. (Under the laws at the time, we were also phased out from even getting to claim a dependent exemption for her.) We did not claim her on her return, but she obediently checked the box on her return that she *could* be claimed as a dependent. In particular, she was not providing more than half of her own support of out of her earned income (or out of any of her income, for that matter.) So she did not qualify for the refund portion of AOTC. But she did have a substantial amount of tax liability, so she could at least claim the nonrefundable portion of AOTC (or, in her case, the Lifetime Learning Credit, which worked out even better for her.)

Nowadays, it is rarer for a college student to have much tax liability (because the standard deduction is so big) so the nonrefundable part of the education credit is often not helpful to them, though it certainly could be, particularly if the student has kiddie tax liability, which could even arise from taxable scholarships. (Yes, to most people's surprise, sometimes part or all of a scholarship can be taxable. And it is generally not considered "Earned Income" by the IRS.)
Thanks for this thorough explanation. Much appreciated.
An important key to investing is having a well-calibrated sense of your future regret.
User avatar
dodecahedron
Posts: 5798
Joined: Tue Nov 12, 2013 12:28 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by dodecahedron »

gobel wrote: Tue Sep 14, 2021 4:53 pm
fortfun wrote: Tue Sep 14, 2021 1:29 pm
dodecahedron wrote: Tue Sep 14, 2021 1:24 pm This is highly variable and complicated depending on the AGI/MAGI of the parents.

For low and moderate income families, claiming a full-time college student under 24 whose primary permanent residence is with the parents, can entitle the parents to claim Earned Income Credit. That can potentially be worth more than even the American Opportunity Credit. In some cases, even non-dependent college students can be claimed by their parents for Earned Income Credit.

Also, claiming college dependents can increase Premium Tax Credits for ACA policies covering one or more household members.
Ughh, very complicated. Is there a good blog to follow where someone explains this stuff? Much appreciated!
If you are being phased out of AOTC (AGI 160k), then these 2 things probably don't even apply.
I agree that if you are being phased out of AOTC, these things probably don't apply, but the OP did not mention phaseouts as their primary issue of concern. The OP only mentioned the larger standard deductions and that dependent exemptions have gone to zero under TCJA.

Many taxpayers claiming these large standard deductions will still benefit from claiming their college student dependents one way or another, even though the $4K exemptions they used to claim are gone and even if the larger standard deduction has zeroed out the parents' taxable income.

The bottom line is that the tax code has many moving parts (above-the-line deductions, below-the-line deductions, nonrefundable credits, refundable credits, carryforwards, phase-ins and phase-outs) so it is impossible to generalize (and very hard to predict in advance in these fast-moving times! Your kid suddenly gets a lucrative summer internship or oops! the Pandemic wiped it out but replaced it with unemployment benefits, which oops! suddenly becomes nontaxable after the tax year has closed. Or oops! their summer internship turns into a full-time gig at a promising tech startup and they decide to take a semester or year or two to possibly make it big before finishing college--if they ever do. Or the parents suddenly lost their job. Or someone got sick. So much unpredictable in this world.)

It is really hard to give universally applicable rules of thumb tax advice about dependents. Something as simple as a college deciding to start up a little late (e.g., in September rather than August) to deal with COVID can jeopardize a student's FT status if the student was not also enrolled in the spring term. (IRS considers a student to be "F/T" if they were enrolled for any part of at least five months during the tax year. So Aug through December qualifies but September through December does not--again, unless they were enrolled in the previous term.) Or a college decides to close a bit early and finish the spring term in late April instead of early May.
Last edited by dodecahedron on Tue Sep 14, 2021 6:35 pm, edited 2 times in total.
secondcor521
Posts: 172
Joined: Wed Sep 10, 2014 4:11 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by secondcor521 »

dodecahedron wrote: Tue Sep 14, 2021 5:07 pm
secondcor521 wrote: Tue Sep 14, 2021 4:51 pm If one is tax planning throughout the year, one might be able to generate enough tax liability to be able to take advantage of the nonrefundable portion of AOTC. For example, making scholarships taxable, or taking nonqualified distributions from a 529, or doing a Roth conversion (admittedly unlikely for a traditional student), or working a job are all things that might generate enough income to generate enough liability to take advantage of both portions of the credit. If one is exceptionally careful, one can in fact dial such things in to where, for example, a non-qualified distribution from a 529 becomes completely tax free (at least at the federal level).
This is complicated. You only need tax liability to take advantage of the NONrefundable portion of the credit, which is why I edited add "non" to what you wrote and highlighted in red above.

The refundable portion does not require any tax liability to take advantage of, but it DOES require sufficient earnings by the student to provide more than half of their support unless the student is over 24 (or both parents are dead or a few other rare exceptions).

And yes, if planned for carefully, it can sometimes be engineered to happen. But it is often hard to predict. Last year, there were a bunch of unpredictably non-dependent students (due to the students qualifying for large amounts of COVID unemployment) and they potentially faced significant kiddie tax on their unemployment but at the last minute Congress changed the law (in March!) to make all or most of that unemployment tax-free, thereby unexpectedly eliminating a lot of student tax liability at the last minute.
Yeah, sorry about mixing up terminology - I find it confusing - my mistake. I know you knew what I'd mean, but it's good for others following along to understand that there are two parts to AOTC - one part which offsets taxes owed and one part that doesn't.

As for the lack of predictability and the government changing the laws retroactively, agreed. I do most of my tax planning in December for just that reason. The retroactive stuff is out of my control so I don't worry about it (other than to be aware and take advantage of the new rules if I can).

If you're referring to HEERF (?) funds, I didn't think that was considered unemployment, but I didn't look at it too closely. In fact, from what I read, it wasn't even considered taxable income. But maybe you're referring to the situation where a college kid had a W-2 job at a restaurant that COVID-closed, and they were eligible for COVID unemployment relief of some form or another.
User avatar
dodecahedron
Posts: 5798
Joined: Tue Nov 12, 2013 12:28 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by dodecahedron »

secondcor521 wrote: Tue Sep 14, 2021 6:04 pm If you're referring to HEERF (?) funds, I didn't think that was considered unemployment, but I didn't look at it too closely. In fact, from what I read, it wasn't even considered taxable income. But maybe you're referring to the situation where a college kid had a W-2 job at a restaurant that COVID-closed, and they were eligible for COVID unemployment relief of some form or another.
Not HEERF money. Rather, our VITA site saw a lot of students with W-2 reporting just a few hundred dollars in work-study money earned at their colleges in the first few months of 2020, who then wound up being sent home in March 2020 and losing their work-study assignments and thereby eligible for regular state department of labor administered unemployment benefits of $15K or more. The students and parents were shocked to see that students with very very minimal work study earnings were still qualified to get $600 per week in unemployment (along with some standard percentage of their lost work study earnings) for many months in 2020.
secondcor521
Posts: 172
Joined: Wed Sep 10, 2014 4:11 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by secondcor521 »

dodecahedron wrote: Tue Sep 14, 2021 6:40 pm
secondcor521 wrote: Tue Sep 14, 2021 6:04 pm If you're referring to HEERF (?) funds, I didn't think that was considered unemployment, but I didn't look at it too closely. In fact, from what I read, it wasn't even considered taxable income. But maybe you're referring to the situation where a college kid had a W-2 job at a restaurant that COVID-closed, and they were eligible for COVID unemployment relief of some form or another.
Not HEERF money. Rather, our VITA site saw a lot of students with W-2 reporting just a few hundred dollars in work-study money earned at their colleges in the first few months of 2020, who then wound up being sent home in March 2020 and losing their work-study assignments and thereby eligible for regular state department of labor administered unemployment benefits of $15K or more. The students and parents were shocked to see that students with very very minimal work study earnings were still qualified to get $600 per week in unemployment (along with some standard percentage of their lost work study earnings) for many months in 2020.
Ah, interesting.

Side point, though - income earned by the student in this case only counts for support purposes if actually spent on support. That's my understanding anyway from reading the support calculation documents at the IRS. So if the college student is living at home with parents and collecting unemployment at $600 a week but parents are paying for groceries, mortgage, etc., student still could be a dependent. It could come down to who paid for the 2020 spring semester though, as that might be expensive and education costs are included in support calculations (again, I think, anyway).

:sharebeer
User avatar
dodecahedron
Posts: 5798
Joined: Tue Nov 12, 2013 12:28 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by dodecahedron »

secondcor521 wrote: Tue Sep 14, 2021 7:01 pm
dodecahedron wrote: Tue Sep 14, 2021 6:40 pm
secondcor521 wrote: Tue Sep 14, 2021 6:04 pm If you're referring to HEERF (?) funds, I didn't think that was considered unemployment, but I didn't look at it too closely. In fact, from what I read, it wasn't even considered taxable income. But maybe you're referring to the situation where a college kid had a W-2 job at a restaurant that COVID-closed, and they were eligible for COVID unemployment relief of some form or another.
Not HEERF money. Rather, our VITA site saw a lot of students with W-2 reporting just a few hundred dollars in work-study money earned at their colleges in the first few months of 2020, who then wound up being sent home in March 2020 and losing their work-study assignments and thereby eligible for regular state department of labor administered unemployment benefits of $15K or more. The students and parents were shocked to see that students with very very minimal work study earnings were still qualified to get $600 per week in unemployment (along with some standard percentage of their lost work study earnings) for many months in 2020.
Ah, interesting.

Side point, though - income earned by the student in this case only counts for support purposes if actually spent on support. That's my understanding anyway from reading the support calculation documents at the IRS. So if the college student is living at home with parents and collecting unemployment at $600 a week but parents are paying for groceries, mortgage, etc., student still could be a dependent. It could come down to who paid for the 2020 spring semester though, as that might be expensive and education costs are included in support calculations (again, I think, anyway).

:sharebeer
Yes, education expenses (tuition as well as room & board), whether for spring or fall term, are included in support. So are clothes, toiletries, haircuts, entertainment, tattoos, makeup, travel, recreation, medical, and *almost* everything else that a student might purchase with their funds. The one major exception: if the student *banked* some of their income and saved it or used it to pay down debt from a prior year that is not considered support provided by the student. Also if the student spent some of their money on gifts for other people that is not support the student provided for themselves. Here is the IRS worksheet for figuring the percentage of support provided by the potential dependent vs by parents or others:

https://apps.irs.gov/app/vita/content/g ... t_4012.pdf

So the key to figuring out whether the child provided more than 50% of their own support is not just how much income they had but what they spent it on.

I have a vivid memory of a 18-year-old client, years ago. She was not a student but still lived with her single mom. Both mom and daughter had pretty low-paid jobs, without a big difference in their incomes. The mom, who was also our client, had always paid all the bills for the household (rent, groceries, utilities, etc.) and had continued to do this in the tax year in question. She had always claimed her daughter as dependent and filed as HoH and expected to do so again this year.

The daughter had spent her earnings that year as she saw fit on, as she put it, "stuff." When we elicited further details as to what the "stuff" was, a lot of it was pretty ephemeral (makeup, nail care, hairdresser, etc.) but there was no savings or debt paydown by the daughter, so we concluded (reluctantly) that the daughter had indeed provided more than half of her own support as the IRS defines it. Mom was very surprised she could not claim her daughter as a dependent that year nor could she use HoH filing status. We told both of them that if the daughter had *saved* more of her income instead of spending it on "stuff," she might have been considered to be providing less than half of her own support.

That said, mom could still claim her daughter as a Qualifying Child for Earned Income Credit, because there is no support test for that tax benefit.

Taxes can be surprisingly complicated in low-income households, as well as in higher income households.
secondcor521
Posts: 172
Joined: Wed Sep 10, 2014 4:11 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by secondcor521 »

^ Right. I've seen that worksheet in the IRS instructions somewhere.

After reading about the support test, I've concluded that what should be listed on various lines of that worksheet is imprecise. Maybe there's more IRS or VITA guidance / documentation out there, but I haven't found it yet. I for one, would not list nail care as something considered as paying for someone's support - I would have been inclined to list those on line 3 of the worksheet, and thus not be part of the 50% support calculation - of course if guidance otherwise was absent.

But then I also probably wouldn't include recreation expenses, yet there it is on the worksheet you linked to so I'd have to. And I'd probably include scholarships reducing tuition owed as support provided by the (potential) dependent, but I know the IRS has stated otherwise.

(And as you know, there can be complicated situations where nobody provides more than 50% support, such as in the case of divorced or multigenerational households. It does indeed get interesting and complicated.)
momvesting
Posts: 331
Joined: Tue Apr 12, 2016 9:18 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by momvesting »

Also, lots of middle income parents (like us) get the $500 credit plus the full $2500 AOTC. Since part of the AOTC is nonrefundable, our child would not receive as much, she would get under ~$1500 based on her previous tax returns. I have also heard from other parents that health insurance is an issue, but for us those two things are independent of each other, but I guess some family situations such as ACA subsidies or deducting high medical expenses could be affected.
HereToLearn
Posts: 848
Joined: Sat Mar 17, 2018 5:53 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by HereToLearn »

I have not seen this mentioned on this thread, but I recall from an older discussion where many insisted that 529 disbursements for tuition, R&B are considered support by the student, even when the account is owned by the parent FBO the student.

I am still hoping to claim my college Sr as a dependent even though the full cost of his tuition, R&B is paid out of a 529. Hope I do not find out later that I have interpreted this incorrectly.
basspond
Posts: 1470
Joined: Wed Nov 27, 2013 4:01 am

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by basspond »

From what I recall, a child can only claim themselves if they provide over 50% of their living expenses. And yes it is very much tax efficient for them to claim.
User avatar
orcycle
Posts: 178
Joined: Mon Jul 11, 2011 9:44 am

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by orcycle »

This thread has been super helpful, thanks to the OP and responders for giving me lots to think about. I feel like I’m threading a needle to stay eligible for AOTC (and possibly LLC), complicated by my college-age daughter working this summer while using a 529 to pay most (but not all!) of her college expenses. We ended up eligible for AOTC last year but didn’t pay for college costs directly, so now I’m trying to figure this stuff out. Forecasting income and deductions/credits is really hard, as someone said earlier, with above and below line adjustments.
Katietsu
Posts: 5273
Joined: Sun Sep 22, 2013 1:48 am

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by Katietsu »

orcycle wrote: Wed Sep 15, 2021 11:07 am This thread has been super helpful, thanks to the OP and responders for giving me lots to think about. I feel like I’m threading a needle to stay eligible for AOTC (and possibly LLC), complicated by my college-age daughter working this summer while using a 529 to pay most (but not all!) of her college expenses. We ended up eligible for AOTC last year but didn’t pay for college costs directly, so now I’m trying to figure this stuff out. Forecasting income and deductions/credits is really hard, as someone said earlier, with above and below line adjustments.
I will add another complication. You can pay for everything with 529 money, elect to claim $4000 of qualifying expenses for AOTC, and the student must then treat a % of 529 withdrawal as unearned income. Specifically, % of withdrawal attributed to earnings times $4000 is treated as unearned income, subject to kiddie tax, by kid. Did this for a relative to use up their 529 money. The $2500 AOTC claimed by parent was huge vs the extra $200 in tax to the student.
secondcor521
Posts: 172
Joined: Wed Sep 10, 2014 4:11 pm

Re: What's the advantage of claiming children as dependents after age 18 (full time college students)?

Post by secondcor521 »

Katietsu wrote: Wed Sep 15, 2021 1:19 pm
orcycle wrote: Wed Sep 15, 2021 11:07 am This thread has been super helpful, thanks to the OP and responders for giving me lots to think about. I feel like I’m threading a needle to stay eligible for AOTC (and possibly LLC), complicated by my college-age daughter working this summer while using a 529 to pay most (but not all!) of her college expenses. We ended up eligible for AOTC last year but didn’t pay for college costs directly, so now I’m trying to figure this stuff out. Forecasting income and deductions/credits is really hard, as someone said earlier, with above and below line adjustments.
I will add another complication. You can pay for everything with 529 money, elect to claim $4000 of qualifying expenses for AOTC, and the student must then treat a % of 529 withdrawal as unearned income. Specifically, % of withdrawal attributed to earnings times $4000 is treated as unearned income, subject to kiddie tax, by kid. Did this for a relative to use up their 529 money. The $2500 AOTC claimed by parent was huge vs the extra $200 in tax to the student.
Another option, which is a similar idea, is to make the student's scholarships taxable. This creates taxable income on line 1, but generally the AOTC is worth enough to offset any resulting tax liability. This idea, of course, requires the student to have enough in scholarships to use the idea. With this idea, one also wants to be careful if the student is receiving FAFSA aid, because the taxable scholarships end up reducing Pell Grants two years later - so proceed with caution and awareness if the student plans to be in college and wanting aid two years from now.
Post Reply