Moving for Grad School - Where am I domiciled and how does that affect tax breaks?

[msdrbeat]

Hello! I moved for two year graduate school away from my home state this August. I was living with my parents before and working a full time job as well as freelancing.

1. I have a 529 from my previous state, and I can get a $2500 tax break for deposits. As I will still pay taxes in State 1, can I still get that deduction?

2. I have continued my freelancing via Zoom instead of in person in State 1. This income is now reported to State 2 once I have moved, correct?

[Hal_Al]

The general rule is: if you go to school out of state, you are still a resident of the state you were living in prior to the move, unless you take other steps to establish residency in the new state. This is particularly true if you lived with your parents and they continue to reside in state 1, and you return to that home on school breaks.

“$2500 tax break for (529 plan) deposits”?  What does that mean?  There is no federal deduction for contributions (deposits?) to a 529 plan.  Many states allow a deduction, on state taxes.   Or do you mean distributions (withdrawals) to pay for school?  Distributions are tax free (there is no $2500 limit) if used for qualified expenses, including room and board.   $2500 is the maximum amount of the American opportunity credit (AOC). Is that what you’re thinking about? The AOC is not available to grad students. There is a Lifetime Learning Credit (LLC)., maximum $2000, available.  But, you cannot double dip.  You cannot count the same tuition money, for the tuition credit,  that gets you an exclusion from the taxability of the earnings (interest) on the 529 plan distribution. 

Are you still your parent's dependent? That affects your ability to claim a tuition credit.  Are you the owner of the 529 plan or just the beneficiary?

State taxes, depend on which two states are involved. But, the general rule is: your report all your income on your home state return, even the income earned out of state. You file a non-resident state return for the state you worked in and pay tax to that state. Your home state will give you a credit, or partial credit, for what you paid the non-resident state.

[Opus 17]

Let's suppose your domicile remains state #1, and you are temporarily living in state #2.

You will be required to file a non-resident tax return for state #2 that declares all your income earned while working in that state.  That will mean you will have allocate your freelance income to state #1 or #2 based on where you were living when you did each project or job.

Then, you will file a resident return for state #1 that reports all your world-wide income.  State #1 will give you at least a partial credit for taxes paid to state #2.  In practice, you should end up paying no more than whichever state has the higher tax rate, but not be double taxed.  In Turbotax, prepare the non-resident state #2 return first, so the credit flows correctly to state #1.  Turbotax will ask you to allocate both your graduate student income (if you receive a stipend) and your freelance income.

Now, beware that some states are aggressive about determining residency and will want to treat you as a resident of state #2 if you live in the state more than 183 days of the year.  You would file a resident return for both state #1 and state #2 reporting your total world-wide income.  There still should be a reciprocal tax credit but it's more complicated.   It would help to know which states we are talking about.  

[Carl]

If going to grad school, that indicates to me that you have already completed 4 years of college as an undergraduate. It also calls into question what you age will be on Dec 31 of 2020. Age matters here. When it comes to things like dependency it matters if you will be under the age of 24 or not, on Dec 31, 2020.

For tax credits, what credits you may or may not qualify for depends on what credits were taken by either you or your parents while you were an undergraduate, and for how many years they took those credits. For example, the American Opportunity Credit (AOC) at a maximum of $2,500 is limited to 4 calendar years. I also think (but not sure) it's only available for the undergraduate years. Whereas the Lifetime Learning Credit (LLC) is a max of $2000 and has no limit on how many times it can be taken, if the student qualifies.