Check whether my understanding of claiming a child as dependent is correct

[acegolfer]

Suppose a 20yo child has a $24k full ride scholarship and $0 earned income, receives no money from parents. The tuition/fees/books (deductible expense) is $7k. So the remaining $17k is taxable (before any standard deduction).

The dependent test says the child is eligible to be claimed as dependent. (If you are wondering why, it's because scholarship is counted towards support per Pub 501) But it doesn't necessarily mean the parents must claim her. Regardless, because of $0 earned income (different rule from dependent test), kiddie tax rate (30%) must be applied.

(edited) Case 1: Parents claim child as dependent to lower parents tax. The kid's taxable income = $17k - $14600 (per Pub 501, Table 8) = $2,400. 30% tax rate = $720

Case 2: Not claimed as dependent. Kid's taxable income = $17k - $14,600 = $2,400. 30% tax rate = $720

So claiming child is the better option.

Is any of the above inaccurate?

[Raycpact]

Does this help?

Earned income. Earned income includes salaries, wages, professional fees, and other
amounts received as pay for work you actually
perform. Earned income (only for purposes of
filing requirements and the standard deduction)
also includes any part of a taxable scholarship.
See chapter 1 of Pub. 970 for more information
on taxable and nontaxable scholarships.

From publication 501, page 3

[newparent7]

I don’t think case 2 is accurate. If your kid can be claimed as a dependent, they don’t get the 14600 standard deduction whether you claim them or not.

[acegolfer]

Does this help?

Earned income. Earned income includes salaries, wages, professional fees, and other
amounts received as pay for work you actually
perform. Earned income (only for purposes of
filing requirements and the standard deduction)
also includes any part of a taxable scholarship.
See chapter 1 of Pub. 970 for more information
on taxable and nontaxable scholarships.

From publication 501, page 3

Ty. So for Case 1, the taxable income is also $17k - $14,600 = $2,400. Correct?

[sailaway]

Sounds like the child provided more than half of their own support and are not eligible to be claimed as a dependent, no?

[bombcar]

Does the scholarship cover room and board?

[FiveK]

Sounds like the child provided more than half of their own support and are not eligible to be claimed as a dependent, no?

Seems a reasonable conclusion.

acegolfer, what result do you get if you complete the Worksheet for Determining Support?

[acegolfer]

Sounds like the child provided more than half of their own support and are not eligible to be claimed as a dependent, no?

I think you are correct. I can't claim her.

EDITED: as another post said "A scholarship received by a child who is a student isn't taken into account in determining whether the child provided more than half of their own support." So the child is eligible for dependent.

[acegolfer]

Does the scholarship cover room and board?

Yes. But room and board expenses are not deductible. Not sure what the purpose of your q is.

[123]

Sounds like the child provided more than half of their own support and are not eligible to be claimed as a dependent, no?

I think you are correct. I can't claim her.

But the IRS says "A scholarship received by a child who is a student isn't taken into account in determining whether the child provided more than half of their own support."https://www.irs.gov/publications/p501#e ... 1000220916

[mageedge]

If the individuals taxable income is $2400 isn't the tax due at the 10% level,not 30%?

[acegolfer]

I think you are correct. I can't claim her.

But the IRS says "A scholarship received by a child who is a student isn't taken into account in determining whether the child provided more than half of their own support."https://www.irs.gov/publications/p501#e ... 1000220916

You are correct. I originally determined she was eligible probably because of this clause. Back to square one, where both Case #1 and #2 are possible.

[acegolfer]

If the individuals taxable income is $2400 isn't the tax due at the 10% level,not 30%?

No because of "kiddie tax" rule.

[mageedge]

If the individuals taxable income is $2400 isn't the tax due at the 10% level,not 30%?

No because of "kiddie tax" rule.

However the kiddie tax rule would only apply if the child were being claimed as a dependent

[acegolfer]

No because of "kiddie tax" rule.

However the kiddie tax rule would only apply if the child were being claimed as a dependent

This is a common misunderstanding. Read https://www.irs.gov/pub/irs-pdf/i8615.pdf. It specifically states dependent or not has nothing to do with kiddie tax rule.

[DIFAR31]

No because of "kiddie tax" rule.

However the kiddie tax rule would only apply if the child were being claimed as a dependent

I don't think that's correct. The instructions for Form 8615 (the "kiddie tax") state that "these rules apply whether or not the child is a dependent."

[DIFAR31]

Suppose a 20yo child has a $24k full ride scholarship and $0 earned income, receives no money from parents. The tuition/fees/books (deductible expense) is $7k. So the remaining $17k is taxable (before any standard deduction).

The dependent test says the child is eligible to be claimed as dependent. But it doesn't necessarily mean the parents must claim her. Regardless, because of $0 earned income (different rule from dependent test), kiddie tax rate (30%) must be applied.

Case 1: Parents claim child as dependent to lower parents tax. The kid's taxable income = $17k - $1300 = $15,700. 30% tax rate = $4710

Case 2: Not claimed as dependent. Kid's taxable income = $17k - $14,600 = $2,400. 30% tax rate = $720

I don't think the parents tax saving in case 1 will offset the higher tax the kid pays.

Is any of the above inaccurate?

If the parents claim the child as a dependent, taxable income = $17k taxable scholarship - $14.6k standard deduction for a single dependent = $2.4k.

[acegolfer]

If the parents claim the child as a dependent, taxable income = $17k taxable scholarship - $14.6k standard deduction for a single dependent = $2.4k.

As replied above, this is correct because the taxable scholarship enters the standard deduction calculation.

EDITED: updated OP with your calculation.

[DIFAR31]

If the parents claim the child as a dependent, taxable income = $17k taxable scholarship - $14.6k standard deduction for a single dependent = $2.4k.

As replied above, this is correct because the taxable scholarship enters the standard deduction calculation.

Alright, so between Case 1 and Case 2, you have your answer, right?

[auburnreddog]

This is a really helpful discussion for us as our child is on a full tuition scholarship and has wages, and unearned income. The unearned income includes capital gains, dividends and interest. We have not been happy with our CPA so I'm attempting to do all our taxes for the first time using FreeTaxUSA. My main insecurity with leaving professional help is doing our child's return. My question is - will FreeTaxUSA handle our child's taxes? He will file separately but as our dependent.

This is my first post to this extraordinarily helpful group, so I apologize if I have strayed off the original topic.

[acegolfer]

As replied above, this is correct because the taxable scholarship enters the standard deduction calculation.

Alright, so between Case 1 and Case 2, you have your answer, right?

But we haven't determined whether the child can be claimed or not. See the debate above. Case #1 may not be an option.

[DIFAR31]

Alright, so between Case 1 and Case 2, you have your answer, right?

But we haven't determined whether the child can be claimed or not. See the debate above. Case #1 may not be an option.

Which part of the dependency test might make the child ineligible to be claimed as a dependent?

[acegolfer]

But we haven't determined whether the child can be claimed or not. See the debate above. Case #1 may not be an option.

Which part of the dependency test might make the child ineligible to be claimed as a dependent?

Some ppl have said above that I can't claim her because she supports herself 100% and I'm not supporting her.

[DIFAR31]

Which part of the dependency test might make the child ineligible to be claimed as a dependent?

Some ppl have said above that I can't claim her because she supports herself 100% and I'm not supporting her.

Why are you now disregarding the post from 123 concerning scholarship money not being taken into account when determining whether the child provides more than half of their own support, and your reply that's in agreement?

Edited to add: 123 even provides a linked reference that is exactly on point.

[acegolfer]

Some ppl have said above that I can't claim her because she supports herself 100% and I'm not supporting her.

Why are you now disregarding the post from 123 concerning scholarship money not being taken into account when determining whether the child provides more than half of their own support, and your reply that's in agreement?

Edited to add: 123 even provides a linked reference that is exactly on point.

I suppose you didn't read my reply to 123. I agreed with him. But Worksheet 2 will determine the dependent eligibility.

[DIFAR31]

Why are you now disregarding the post from 123 concerning scholarship money not being taken into account when determining whether the child provides more than half of their own support, and your reply that's in agreement?

Edited to add: 123 even provides a linked reference that is exactly on point.

I suppose you didn't read my reply to 123. I agreed with him. But Worksheet 2 will determine the dependent eligibility.

I did read your reply, and I noted right above that you agreed with 123, but for some reason you are now equivocating. I don't know what Worksheet 2 you are referring to. Go through the Qualifying Child and Dependency tests that start on page 17 of the 2024 1040 instructions. The test step for providing support specifically refers to Pub 501, which is also the link provided by 123. You are making this much harder than it needs to be.

[TheGuru1]

Please stop the madness. The child COULD be claimed as a dependent, therefore, the child cannot file on his or her own without taking that into account.

[acegolfer]

I did read your reply, and I noted right above that you agreed with 123, but for some reason you are now equivocating. I don't know what Worksheet 2 you are referring to. Go through the Qualifying Child and Dependency tests that start on page 17 of the 2024 1040 instructions. The test step for providing support specifically refers to Pub 501, which is also the link provided by 123. You are making this much harder than it needs to be.

Worksheet 2 titled "Worksheet for Determining Support" is in page 16 of Pub 501.

[acegolfer]

I don’t think case 2 is accurate. If your kid can be claimed as a dependent, they don’t get the 14600 standard deduction whether you claim them or not.

Work through "Table 8.Standard Deduction Worksheet for Dependents" in Pub 501. The dependent with taxable scholarship can get $14600 standard deduction.

https://www.irs.gov/publications/p501

[acegolfer]

[Thread merged into here --admin LadyGeek]

I just learned about AOTC and started to read documents but a bit confused. Specifically, https://www.irs.gov/pub/irs-utl/Interac ... redits.pdf reads

"In many cases where QTRE - $4,000 < scholarships, the student should include enough scholarships in income in order to claim $4,000 in expenses for the AOTC."

Suppose a student received $24,000 in scholarship. Qualifying tuition and related expenses (QTRE) is $7,000. Is this IRS document saying the child should deduct $3k (instead of $7k) to maximize AOTC?

[bongo]

Case 1: Parents claim child as dependent to lower parents tax. The kid's taxable income = $17k - $1300 = $15,700. 30% tax rate = $4710

Case 2: Not claimed as dependent. Kid's taxable income = $17k - $14,600 = $2,400. 30% tax rate = $720

My guess is that the student gets the standard deduction in either case, then has no kiddie tax (at the parent's rate) since the remainder is < $2600. They will owe tax on the remaining $2400 at their own 10% rate, or $240.

Case 1 is still better though since I think the parent gets to claim the $500 other dependent credit.

[mageedge]

You've got the concept correct however it's worth noting the provisions of AOTC. maximum credit is $2500, the first $2000 of qualified expenses is credited at 100%, the next $2000 at 25% to reach the $2500 max.
In your earlier thread on the scholarship and kiddie tax you indicated the tax rate would be 30%. If that is the case then you may want to limit your taxable income increase to $2000 and claim $2000 AOTC. The second $2000 would get you $500 in AOTC but would incur a tax liability of $600

[DIFAR31]

Case 1: Parents claim child as dependent to lower parents tax. The kid's taxable income = $17k - $1300 = $15,700. 30% tax rate = $4710

Case 2: Not claimed as dependent. Kid's taxable income = $17k - $14,600 = $2,400. 30% tax rate = $720

My guess is that the student gets the standard deduction in either case, then has no kiddie tax (at the parent's rate) since the remainder is < $2600. They will owe tax on the remaining $2400 at their own 10% rate, or $240.

Case 1 is still better though since I think the parent gets to claim the $500 other dependent credit.

With the facts presented by OP (no income other than the $17k in taxable scholarships), and assuming that the child does qualify as a dependent, after the dependent's standard deduction of $14.6k there will be $2.4k in taxable income. I believe that Form 8615 will allocate all of that to the kiddie tax, meaning the child will owe tax on that $2.4k at the parent's top marginal bracket rate.

[acegolfer]

You've got the concept correct however it's worth noting the provisions of AOTC. maximum credit is $2500, the first $2000 of qualified expenses is credited at 100%, the next $2000 at 25% to reach the $2500 max.
In your earlier thread on the scholarship and kiddie tax you indicated the tax rate would be 30%. If that is the case then you may want to limit your taxable income increase to $2000 and claim $2000 AOTC. The second $2000 would get you $500 in AOTC but would incur a tax liability of $600

makes sense.

[bongo]

My guess is that the student gets the standard deduction in either case, then has no kiddie tax (at the parent's rate) since the remainder is < $2600. They will owe tax on the remaining $2400 at their own 10% rate, or $240.

Case 1 is still better though since I think the parent gets to claim the $500 other dependent credit.

With the facts presented by OP (no income other than the $17k in taxable scholarships), and assuming that the child does qualify as a dependent, after the dependent's standard deduction of $14.6k there will be $2.4k in taxable income. I believe that Form 8615 will allocate all of that to the kiddie tax, meaning the child will owe tax on that $2.4k at the parent's top marginal bracket rate.

oh, I think you're right. If the standard deduction is all used against earned income, then the student would still have up to $2600 buffer at their own 10% rate. But if the standard deduction is because of the taxable scholarship, then that buffer is $0 and rest is on kiddie tax.

Maybe the OP can have the student claim AOTC and zero out the kiddie tax (although then OP would lose the $500 other dependent credit so the net savings might be small?)

[acegolfer]

[Thread merged into here --admin LadyGeek]

Daughter is a college freshman (started in 08/2024). 2024 1098-T, Box 1 = $3,000. Box 5 - $13,000. 2024 W2 Box 1 = $1,000

In 2024, she lived 7+ months with us and we provided more than 1/2 support. So parents can and will claim the child. her tax liability is $0 because her AGI < standard deduction.

Question: if she files her own 1040 (should she or not?), can parents still claim $2000 AOTC? Or does the kid claim AOTC and get 40% refund?

(I believe I provided necessary information. but let me know if more information is needed)

EDITED: Based on the replies, the correct answer is only the parent can claim AOTC. The dependent can't claim AOTC.

[Harmanic]

Yes, as long as she selects "claimed as a dependent on another tax return" for her return, you should be fine. This happens when students have part time jobs and internships.

You claim her as a dependent, you claim AOTC
She declares that she is a dependent, she does NOT claim AOTC.

Note this can only be done for four years. After that you revert to the standard educational deduction.

[acegolfer]

Yes, as long as she selects "claimed as a dependent on another tax return" for her return, you should be fine. This happens when students have part time jobs and internships.

You claim her as a dependent, you claim AOTC
She declares that she is a dependent, she does NOT claim AOTC.

Note this can only be done for four years. After that you revert to the standard educational deduction.

Thanks. So is this the right action for the lowest family tax liability with AOTC? (correct me if any of this is inaccurate)

1. Parents claim child as dependent. Report $2k education expense and receive $2k AOTC (does parent also enter child's 1098-T?)
2. Child selects someone claims her as dependent in 1040. Gross income = $13k + $1k = $14k. deduct $1k (not $3k) for education. AGI = $13k (less than $14,600 standard deduction). $0 tax liability.

[acegolfer]

On another thought, perhaps better for parents to report all $3k education expense and get $2250 AOTC. Student's AGI = $14k still under $14,600.

[Harmanic]

Yes, the parent enters the 1098-T, not the student.

[Harmanic]

On another thought, perhaps better for parents to report all $3k education expense and get $2250 AOTC. Student's AGI = $14k still under $14,600.

I don't think you can split the education expenses like that anyway. Maybe someone else can confirm.

[acegolfer]

Yes, the parent enters the 1098-T, not the student.

I don't get it. If the student files 1040, how does he not enter 1098-T, which has scholarship information?

[Harmanic]

Yes, the parent enters the 1098-T, not the student.

I don't get it. If the student files 1040, how does he not enter 1098-T, which has scholarship information?

Because the student is your dependent. They only include their income on their return and everything else goes on your return. They do not claim any deductions, because you are claiming them.

[acegolfer]

I don't get it. If the student files 1040, how does he not enter 1098-T, which has scholarship information?

Because the student is your dependent. They only include their income on their return and everything else goes on your return. They do not claim any deductions, because you are claiming them.

Isn't the scholarship in 1098-T part of student's gross income? Or is that part of parent's gross income?

[Harmanic]

Because the student is your dependent. They only include their income on their return and everything else goes on your return. They do not claim any deductions, because you are claiming them.

Isn't the scholarship in 1098-T part of student's gross income? Or is that part of parent's gross income?

Undergraduate scholarships are not considered income if used for educational expenses at degree granting institutions. And yes, the 1098-T including all expenses and scholarships goes on the parent tax return. The student cannot claim any deductions as a dependent.

See page 6. https://www.irs.gov/pub/irs-pdf/p970.pdf

EDIT: Taxing of graduate scholarships has not been implemented. My mistake.

[acegolfer]

Undergraduate scholarships are not considered income if used for educational expenses at degree granting institutions. And yes, the 1098-T including all expenses and scholarships goes on the parent tax return. The student cannot claim any deductions as a dependent.

See page 6. https://www.irs.gov/pub/irs-pdf/p970.pdf

EDIT: Taxing of graduate scholarships has not been implemented. My mistake.

You are contradicting a lot replies in this thread. viewtopic.php?p=8236530#p8236530

[Harmanic]

Undergraduate scholarships are not considered income if used for educational expenses at degree granting institutions. And yes, the 1098-T including all expenses and scholarships goes on the parent tax return. The student cannot claim any deductions as a dependent.

See page 6. https://www.irs.gov/pub/irs-pdf/p970.pdf

EDIT: Taxing of graduate scholarships has not been implemented. My mistake.

You are contradicting a lot replies in this thread. viewtopic.php?p=8236530#p8236530

I don't see any contradiction. Also note that the student does not get to claim the standard deduction filing as a dependent. You might want to read the IRS publication closely. Link above.

[acegolfer]

Also note that the student does not get to claim the standard deduction filing as a dependent. You might want to read the IRS publication closely. Link above.

I disagree. See Pub 501 "Table 8.Standard Deduction Worksheet for Dependents"

If what you said is correct, then what's the point of this Table 8? https://www.irs.gov/publications/p501

[ncdcpa]

On another thought, perhaps better for parents to report all $3k education expense and get $2250 AOTC. Student's AGI = $14k still under $14,600.

I don't think you can split the education expenses like that anyway. Maybe someone else can confirm.

Looking at pub 970 and the instructions for for 8863, it looks like you may be able to do this, if certain conditions are met. You would want to consult instructions under Adjusted Qualified Education Expenses, starting on page 4, including the examples. Among the conditions is that the scholarship/grant money involved is not restricted to qualified education expenses (e.g., tuition).

[acegolfer]

I did read your reply, and I noted right above that you agreed with 123, but for some reason you are now equivocating. I don't know what Worksheet 2 you are referring to. Go through the Qualifying Child and Dependency tests that start on page 17 of the 2024 1040 instructions. The test step for providing support specifically refers to Pub 501, which is also the link provided by 123. You are making this much harder than it needs to be.

Since you Sounds know more about this than others (and me), I have a related q.

Suppose the parents claim the child as dependent and the child files his 1040 (checked someone claim him as dependent).

Who enters 1098-T information in 1040? I thought it was the child because scholarship is his income. But another person said undergrad scholarship is NOT child's income and the parents enter 1098-T in their 1040. (viewtopic.php?p=8242368#p8242368)