Should/Must I claim my college student children as dependents

[Patlmac]

I would like to know if I am required to claim my children (both college students) as dependents, or if I should even if not required.

I have run TurboTax on both scenarios.

Because of my income, I will not get any tax credit by claiming their tuition.  My tax due did not change at all by entering their 1098-T's or any other college info... and reading the worksheet confirms that it is because of my income.

Running a second set of tax files for all of us, TurboTax calculated that my Tax due will increase by $1000 if I stop claiming them as dependents (they are 19 and 21 and live at home when not at school).  However, EACH of THEIR tax refunds will change by + $1000 by filing as not being my dependent.   This is a net change of + $1000.00 for the household.

Is it legal to stop claiming them as my dependents?  Is it a good idea?  Is it possible that these calculations are wrong?  Would I be able to change back next year if the numbers warrant it?  thanks for your help.

[Hal_Al · Accepted solution]

No, you don't "have to" claim them.  But they don't get to claim that $1000 (each) either.  So, just claim them and get your $1000 (two $500 "other dependent" credits).

There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working*. He cannot be supporting himself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit.  If the parents aren't eligible, nobody gets it. 

They  cannot claim a credit if they are, or can be, claimed as a dependent by someone else.

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. 

*When the student indicates, in TurboTax (TT),  that he cannot be claimed as a dependent, and TT sees his age and student status, an additional support question, about earned income,  is added to the interview. TT appeared to allow the student the credit, because you did not go thru the whole interview again  (there is not a glitch in TT).

[Patlmac]

@Hal_Al thanks for your reply...

The $1000 each that I'm referring to is the amount TurboTax added to their returns when I told it that they were not being claimed as dependents by anyone.  They DID have part time jobs, but not nearly enough to support themselves... But I would think the tax code would be able to figure that out... TurboTax's error checker found nothing wrong after the change and the refund increase of $1000.  In my daughter's case, TurboTax says that she would be getting a bigger refund than the tax she paid.   Not surprising that these "urban legends" get going when the program seems to agree with it and then says there's almost no chance of an audit.

I'm not a risk-taker (at least with the IRS), so I'll probably keep them as my dependents... but I'm surprised that TTax doesn't throw up any red flags about this.

[Patlmac]

@Hal_Al Thanks again for your response.   I'll look through it all again and make sure everything is correct.   I appreciate the help!

[Hal_Al]

I added this paragraph to my original answer:

When the student indicates, in TurboTax (TT),  that he cannot be claimed as a dependent, and TT sees his age and student status, an additional support question, about earned income,  is added to the interview. TT appeared to allow the student the credit, because you did not go thru the whole interview again  (there is not a glitch in TT).

[550 Driver]

Is it legal to have the student listed on my taxes and have her own 1040 for earned income at college ?

[DoninGA]

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@550 Driver wrote:

Is it legal to have the student listed on my taxes and have her own 1040 for earned income at college ?

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Sure.  A dependent can file their own tax return.  They just have to indicate on their tax return that they can be claimed as a dependent.

You cannot enter on your tax return a dependent's earned income reported on a W-2 or their earned income from self-employment.

[DoninGA]

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@DoninGA wrote:

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@550 Driver wrote:

Is it legal to have the student listed on my taxes and have her own 1040 for earned income at college ?

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Sure.  A dependent can file their own tax return.  They just have to indicate on their tax return that they can be claimed as a dependent.

You cannot enter on your tax return a dependent's earned income reported on a W-2 or their earned income from self-employment.

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When the dependent is filing their own tax return using TurboTax, in the My Info section for their personal information there is a selection that asks if they can be claimed as a dependent, they must indicate Yes.

[550 Driver]

Thank You 

[LaughTrack]

I have a similar, though slightly different issue.   My daughter graduated from college in the spring of 2020 and started a full time job in August (and lives independently.)   We paid for her education expenses before she graduated, which were significant and cost more than she earned in 2020.   Is she a dependent or not?   (I'm not sure which is "better" from a tax standpoint.)

[Hal_Al]

@LaughTrack - Yes, probably,  because you paid for her education expenses before she graduated, which  cost more than she earned in 2020, indicating the support test is met.  But, you also have to meet the other two rules (residency and age/student status).

Graduation year 

If he/she was a student (under 24) for at least 5 months and lived with you for more than half the year, and did not provide more than 1/2 his own support for the whole year, you can still claim him. Be sure he knows you're claiming him, so he doesn't claim himself. He can only be claimed once. But, he can "file taxes" without claiming his own exemption.

The real question is who should be claiming him in this "transition" year to adulthood. You two have to agree on who is going to claim his exemption. Each should do their taxes both ways and see which way the family comes out best.  Even then, you have to meet the rules. The rule is that a child of a taxpayer can still be a “Qualifying Child” dependent, regardless of  his income, if:

1. he is a full time student under 24 for at least 5 calendar months of the year (graduating in May usually means you meet the 5 month rule)
2. he did not provide more than 1/2 his own support  (scholarships are considered 3rd party support and not support provided by the student). 
3. lived with the parent (including time away at school) for more than half the year

So, it usually hinges on  "Did he provide more than 1/2 his own support in 2020.

The support value of the home you provided is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants. IRS Publication 501 on page 20 has a worksheet that can be used to help with the support calculation. See: http://www.irs.gov/pub/irs-pdf/p501.pdf

(page 15)

[ToddL99]

For you to claim her as a dependent, she would have had to be no more than 24 yrs old on 12/31/2020 and have provided less than 50% of her support for all of 2020 (see other requirements below)

The principal benefit of claiming her as a dependent is that you may qualify for any Education Credits (primarily the American Opportunity Tax Credit) she is eligible for. (There are no longer any "dependent exemption allowances)".

From Who can I claim as my dependent?: In order for you claim your child as a dependent, she would have to meet the following criteria:

• They're related to you.
• They aren't claimed as a dependent by someone else.
• They're a U.S. citizen, resident alien, national, or a Canadian or Mexican resident.
• They aren’t filing a joint return with their spouse.
• They're under the age of 19 (or 24 for full-time students).
  • No age limit for permanently and totally disabled children.
• They lived with you for more than half the year (exceptions apply) (full-time students meet this requirement)
• They didn't provide more than half of their own support for the year.

("Support" includes food, lodging, clothing, medical and dental care, education, transportation, utilities, and so forth).

[Hal_Al]

For 2020, the principal benefit of her being able to claim herself is the $1800 (1200 + 600) stimulus/rebate credit.

 As to the American Opportunity Credit (AOC), there is a 4 time limit and you have probably already used all 4.  Either of you* can claim the education credit (the Lifetime Learning Credit if all 4 AOCs have been used) but based on income and tax liability, you would probably come out better.

*For a student under 24, there is an earned income requirement for the refundable portion of the AOC. But if she meets the support test for claiming herself, she probably meets the earned income support test for the AOC too.