I am a undergraduate student (under 24) and am trying to decide whether I can be claimed as a dependent by my parents. I am a bit confused on how to calculate my total support to determine whether I provided more than half of my own support. I'll make up some numbers as an example - suppose I paid $10K of my expenses from earned income, my parents paid $8K of my expenses during the year, and a scholarship I have paid $30K of my expenses (the scholarship exceeds qualifying education expenses if that matters). Based on looking at Pub. 501 and Section 152 of the tax code, I feel like there are two possible interpretations:
1) (The common interpretation I have seen on the forums thus far) I haven't provided half of my own support. My total expenses were $48K, the scholarship paid for $30K of my expenses and I only paid for $10K, and scholarships don't count as me providing my own support - $10K / ($10K + $8K + $30K) < 1/2. I can be claimed as a dependent.
2) Section 152 of the tax code says that "amounts received as scholarships... shall not be taken into account" for the purposes of determining whether a student provided more than half of their own support and Pub. 501 also notes "a scholarship received by a child who is a student isn't taken into account..." and later on, in the qualifying relative section, notes not to count scholarships received by student children in total support. Then my total support provided, not accounting for the scholarship amount, is $18K, and I provided more than half of my own support ($10K / $18K > 1/2). I can't be claimed as a dependent.
I'm confused because it seems that the first interpretation counts scholarships received in total support which goes against what's stated in Pub. 501, while the second interpretation seems to omit a lot of expenses incurred during the year (namely, education expenses). Which interpretation is correct, or are both reasonable? Thanks!
You are simply misinterpreting the 2nd part. Scholarships are third party support and do not count as support provided by the student, under the qualifying child dependent rules.
Educational costs ARE part of your support.
Sorry for not replying earlier. Where in the laws/publications are you seeing that scholarships are counted as third party support? In Pub. 501 it explicitly states to not count scholarships received in total support, and the relevant test is whether the student provides more than half of their total support. (Thus, scholarships are not counted as provided by the student, i.e. the numerator, but are also not counted in the denominator of total support, in my reading.)
I'm interpreting the wording on the support work sheet.
You do not include scholarships on line 1 (student's funds). So, it's not in the numerator.
You do include total educational expenses on Line 15, even those paid by scholarship.
So, scholarships, per se are not entered on the work sheet. So "scholarships are third party support" may not be technically correct, that's the effect.
There are only two possible ways a student can lay any claim to providing more than half of their own support.
1. The student is self-employed or has a W-2 job that earns them sufficient income to support a claim of providing more than half of their own support. The earned income must be more than the total of all third party support (scholarships, grants, 529 distributions, Gift from Aunt Mary, money from mom and dad, etc.) received from all sources during the tax year.
2) The student is the *PRIMARY* borrower on a *qualified* student loan and sufficient funds were distributed to the student during the tax year to support a claim of providing more than half their own support. Additionally, the amount distributed from the loan during the tax year must exceed the total of all third party support (clarified above) received from all sources during the tax year.
Even if one or both of the above are true, it's still possible for the student to qualify as a dependent on the parents tax return. If you'll note, there is *NO* limits on the student's earned income, or borrowed money. The student could earn a million dollars (literally!) and still qualify as a dependent on the parent's tax return.
This is because this is based on "support", not income. The support costs also have to be reasonable. For example, if the student earned $100,000 during the tax year, and also received $80,000 in scholarships, grants, 529 distribtions, etc, that would mean the total cost of support for the student for the entire tax year would have to exceed $160,000. That is not going to fly with the IRS for an undergraduate student for just one year. I don't care where the student may be attending college on this planet.
In other words, costs have to be reasonable. So no $5000/mo penthouse suites with steak and eggs for breakfast and steak and lobster for lunch and dinner everyday as they take their high cost chauffeured limousine to class each day.
Yeah, it sounds ridiculous. But you get the point. 🙂