2023 Michigan Exemption reduced to $1500

[bluemax786]

Hello,

My college going son is filing as "Single", completes the Federal questionarrie for Dependant as follows:

1. Another Taypayer CAN claim me as a dependant ? YES

2. Will They ACTUALLY claim me as a dependant ? NO

I pay more than 50% of his support. But I will NOT claim him as a dependant on my taxes.

However, when TT caries forward that information to Michigan State,

the Personal exemption is reduced to $1500(9e) from $5400(9a)

as he is showed to be claimed as dependent which is not the case.

Why is TT for MI state not considering the response to the second question to accurately determine

personal exemption of $5400 for my son taxes ?  

[Hal_Al]

$1500 is correct.

Line 9 of MI Form MI-1040 (emphasis added):

9. EXEMPTIONS. NOTE: If someone else CAN claim you as a dependent, check box 9e, enter 0 on line 9a and enter $1,500 on line 9e (see instr.)

Why are you not claiming him as a dependent?

With the federal  tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased.

The usual reason is that the parent is not eligible for the education  credit. 

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. He cannot be supporting himself 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. This is worth up to $2500 (AOTC shifts to all non refundable)

[bluemax786]

Hello Hal_Al,

Thank you for responding. I appreciate it.

I as Parent is not eligible to claim AOTC credit. Hence I am not claiming him as dependant and forging $500 dependant credit.

My son also needs to file taxes since he had a summer job (>13850) and is applying for AOTC credit.

He is getting only Non-refundable Ed credit which reduces his tax libiality to zero.

I understand he is not eligible for refundable Ed credit based on that 50% support condition.

What I don't understand is , why MI-1050 9e. says Claimed as Dependent and shows 1500 instead of full exemption of 5400 in 9a., when I am NOT going to claim him at all. 

To get full MI exemption, I have to answer the 1st question as NO

(If another taypayer CAN claim you as dependent).

This is where I need to to intrepret correctly that even if my son is NOT claimed by anybody,

MI-1050 will not allow full exemption since he is considered as "dependant" all along. 

Is that correct ?

Another strange point :

If I select YES and NO as below

1. Another Taypayer CAN claim me as a dependant ? YES

2. Will They ACTUALLY claim me as a dependant ? NO

Do either of these statements apply to the other Taypayer (which is me)

3. This person is required to file a tax return - NO

4. This person is filing taxes for reason OTHER than getting a refund for taxes  paid - NO

This is how TT comments when I answer NO  for above  3 and 4 questions :

Based on this, we will remove the checkmark indicating "ANOTHER TAXPAYER CAN CLAIM xxx AS DEPENDANT".

So technically the 1st Question should be answered as NO. 

1. Another Taypayer CAN claim me as a dependant ?

Let me know your thoughts. 

[Hal_Al]

Q. What I don't understand is , why MI-1050 9e. says Claimed as Dependent and shows 1500 instead of full exemption of 5400 in 9a., when I am NOT going to claim him at all. 

A. The rule in MI is the same, as on the federal return; if he qualifies as somebody else's dependent, he cannot claim himself, even if that somebody else doesn't actually claim him.  There is no longer a consequence, on the federal return, because exemptions were eliminated in 2018. 

In the personal info section, you entered:

1. Another Taxpayer CAN claim me as a dependent ? YES

2. Will They ACTUALLY claim me as a dependent ? NO

That info carries over to the state return.

Q. This is where I need to to interpret correctly that even if my son is NOT claimed by anybody,

MI-1050 will not allow full exemption since he is considered as "dependent" all along. 

Is that correct ?

A. Yes.

You go on to say:

Do either of these statements apply to the other Taxpayer (which is me)

3. This person is required to file a tax return - NO

4. This person is filing taxes for reason OTHER than getting a refund for taxes  paid - NO 

Q. So technically the 1st Question should be answered as NO. Right?

A. No. Questions 3 & 4 are another way of determining whether he CAN be claimed as a dependent. If you answer 3 & 4 as No, TT will uncheck the box on the federal return.  What I don't know, for a fact, is whether that same rule applies to MI. I don't find it in the MI instructions. Since TT is not allowing it, it probably doesn't. 

[Hal_Al]

@bluemax786  Are you saying that you actually do not need to file a return of your own or was that just a hypothetical question? I assumed earlier that you were not eligible for the AOTC because your income was too high.  If the opposite is true, you're not filing because your income is too low, you do qualify for the refundable portion of the AOTC (up to $1000). 

Another thing to consider, you and your son are limited to claiming the AOTC 4 times. Do you want to use one up on a low amount, if it might be higher later. The AOTC is only good for undergrad education (you can count it for grad school in the same year that you complete your BS/BA). 

[bluemax786]

Hello Hal_Al,

Thank you for responding. Appreciate it.

Due to high income, I cannot claim AOTC for 2023.

AOTC was claimed only once and my son is finishing his undergrad degree in Summer 2024.

He will start Grad degree in Fall 2024.

So he can avail AOTC one last time for 2024 also which will be still less than 4 times.

Correct ?

Regarding these questions below, I am filing to get a refund for taxes paid like most others.

So how should I answer them ?

Do either of these statements apply to the other Taxpayer (which is me)

3. This person is required to file a tax return - ??

<<the term required was misunderstood, probably should be YES >>

4. This person is filing taxes for reason OTHER than getting a refund for taxes  paid -

<<this is definately NO since I am filing for getting refund on paid taxes>> 

Please advise.

[Hal_Al]

Q. So he can avail AOTC one last time for 2024 also which will be still less than 4 times.

Correct ?

A. Yes, can and should.

Q. Regarding these questions below, I am filing to get a refund for taxes paid like most others.

So how should I answer them ?

Q. Answer yes.  There is actually only ONE question: "Do either of theses statements apply to the other taxpayer?" You answer yes if only one of them is true.  And yes, you are required to file a tax return, because your income is over the filing threshold. 

The 2nd question (This person is filing taxes for reason OTHER than getting a refund for taxes  paid) is poorly  worded. It means somebody who doesn't have enough income to have to file a tax return, but needs to file only to get back tax withholding. 

[bluemax786]

Thank you very much Hal_Al for your guidance and support.

Sincerely appreciate it with thanks.