Dependents & Lifetime Learning Credit

[LFields]

My 22-year old student daughter is not eligible for the lifetime learning credit because she is my dependent. Do I have to claim her as a dependent just because I can?

[MayaD · Accepted solution]

No. You can choose not to claim your daughter as a dependent on your return. However, if she qualifies as a dependent but you choose not to claim her on your return, she won’t be able to claim herself on her own return.

[Hal_Al]

While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out.  A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return.

If you haven't already claimed the 4 AOTCs , already, she can claim it, instead of the Lifetime Learning credit (LLC). The AOTC  is worth up to $2500 (AOTC shifts to all non refundable) on only $4000 of tuition ($10K for LLC). 

[LFields]

Thanks for your response. My daughter is in grad school and no longer eligible for the AOTC, but she could use the Lifetime Learning Credit for the income she has. If she derives more than half of her support from her own income plus distributions from a 529 plan, would she no longer qualify to be our dependent? And would she then be able to claim the LLC?

[Hal_Al · Accepted solution]

Q. If she derives more than half of her support from her own income plus distributions from a 529 plan, would she no longer qualify to be our dependent?

A.  No. 529 distributions are considered parental support.*

Q. And would she then be able to claim the LLC?

A.  If she is not your dependent, she would be eligible  for the LLC.  Actually, she's eligible now, if you don't claim her, even though you can.

 If the student actually has a tax liability, there is a provision to allow him/her to claim a non-refundable tuition credit (LLC for grad students). But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return.

*The treatment of expenses paid with distributions from Sec. 529 plans and Coverdell ESAs in the support test is uncertain because of the dual nature of these college savings vehicles and a lack of IRS guidance. The consensus among tax experts is that it is parental support, because the parent is the owner of the plan.  If you are going to try to claim it as student self support,  would be helpful, to your case, to make distributions to the  beneficiary or school, not the owner.