Education Credits (AOTC/LLC) eligibility and dependency rules/filing requirement

[SK469]

Hi,

I’m seeking clarification on the Education Credit (AOTC/LLC) eligibility, dependency rules and filing requirements for my child for the 2025 tax year (filed in 2026). Additional background is provided below. Please advise. Thank you.

Child's Information:

• 22 years old, single
• Full‑time college student for the Spring 2025 term (Jan–May); graduated May 2025
• Began full‑time employment shortly after graduation. W‑2 wages exceed $15,750
• Lived with parents for the entire year. Parents provided full support for the entire year.
• Received Form 1098‑T and Form 1099‑Q in the child’s name.
  - 1098‑T: Box 1 $8,250; Box 8 checked (at least half-time student); All other boxes blank
  - 1099‑Q: Box 1 $5,250
  - Total Tuition: $8,250 ($5,250 from 529 distribution and $3,000 parent OOP)
  - Child is the beneficiary on the 529 plan.
• Parent claimed four years of the AOTC for 2021 thru 2024

Questions:

1. Dependency status: Based on the above, can the child still be claimed as a qualifying child dependent for 2025 on parent tax return, given that they were a full‑time student only for part of the year and then became employed full‑time after graduating?
2. Child’s filing requirement: Is the child required to file their own 2025 return based on their W‑2 income level? If so, how does the answer to Question 1 affect the child’s return - specifically with respect to filing status, dependency status, standard deduction, and eligibility for credits/deductions/refunds?
3. Education Credits / Reporting: Since the parents are no longer eligible for the AOTC (having already claimed it for four years), does the 1098‑T and 1099‑Q information need to be reported at all - either on the parents’ return, or on the child’s return (if the child must file)? Additionally, are there any remaining education related benefits (like LLC) that can be claimed?

Thank You!

[DawnC]

1. Yes, you can still claim them since they are considered a full-time student for tax year 2025, assuming you meet all of the other requirements.    The rule is that the student has to be enrolled at least one day of any 5 months, so since they were a student the first 5 months, they are still a dependent.   IRS definition.
2. Yes,  they have to file their own return and since you can still claim them, they must check  “Someone can claim me as a dependent” on their return.        
3. No, the 1098-T and the 1099-Q do not have to be entered - they are informational documents and not required to be entered unless they have an effect on your return.    No one can claim the AOTC since that has been claimed for the student for 4 years.   Since you, the parents, can claim the child, you may be able to benefit from the Lifetime Learning Credit (LLC).   You can apply the 1099-Q to the tuition and that leaves $3k (or more), available for the LLC - and since the 1099-Q was used for qualified expenses, you do not have to report the 1099-Q at all.   It only becomes reportable if there are taxable earnings.  

And you only need to include the 1098-T if you end up claiming the LLC credit.    Whether it is worth it for you to claim the credit depends on your MAGI and your tax liability.  The details are in the link I posted above.

Who can I claim as a dependent?

[Hal_Al]

Room and board, books and a computer are qualified expenses for a 529 plan distribution.  So, it's probable that the parents can claim most of the $8250 of tuition for the Lifetime Learning Credit (LLC).   They should probably claim all of the $8250 for the LLC, even if it means the student pays a little tax on the 529 earnings (the 10% penalty is waived in this situation). 

As to the dependency issue, she probably qualifies as your dependent, but it may be necessary (but probably not) to run the support calculation. 

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

The support test is different for each type. The support test, for a QC, is only that the child didn't provide more than half his own support. The support test for a Qualifying Relative is that the taxpayer provided more than half the relative's support.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on himself.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.  Support from a 529 plan, where the parent is the owner, is considered as coming form the parent, not the student-beneficiary. 

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

With the 2018 tax law change, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, she only qualify for an education credit, if she is not a dependent.

[SK469]

Thank you DawnC and Hal-Al for your inputs.

[SK469]

@DawnC 

Hi - I am currently working on MY tax return in TurboTax and have a follow-up question.  Please advise. Thanks!

1. I did not enter anything for "Form 1099-Q" under "Deductions & Credits / Education" section in TurboTax.

2. Per your earlier advise, how do I apply the $5250 (from 1099-Q Box 1) to tuition, in TurboTax "Deductions & Credits / Education / Form 1098-T" screen, so that only $3000 is used for LLC? I enclosed a screenshot from TurboTax "Form 1098-T" screen for reference. As you could see, Box 1 states "Enter the exact amount that's in your form". So, I am bit confused as to how to adjust the Box 1 so that only $3000 is used for LLC.