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State of residence for US citizen college student whose parents live outside the US

My husband and I are US citizens but live/work outside the US.  We lived in MD for a few years (in the middle of 20+ years overseas), and own a rental property in MD, file MD state taxes, have MD driver's licenses, and vote in MD.


Our oldest son just turned 18 and will be attending college in Washington state.  He lived with us outside the US, attended all 4 years of high school outside the US while living with us.  He does not have a driver's license or state ID, is not yet registered to vote, and has no ties himself to Maryland, no relatives in the state, has no plans to return there, etc.  It seems to me that it would be logical for him to get a Washington driver's license, as I don't even know how/where he'd spend time in MD to get one there.  Same with voting-- it could be logical for him to vote in local elections in Washington, but not in MD where he has no ties and doesn't know what's going on.  I am wondering if he can do this.  And, then, in turn, whether he can be considered a Washington resident for income earned from a part-time job while in college. (He won't be at a public university, so we are not talking about residency for tuition purposes.)


(Given our tax situation/income levels, and that we are using money in 529s to pay the tuition not covered by scholarships, I don't *think* my husband and I would get much tax benefit from his educational expenses-- just mentioning in case his state of residence is somehow affected by whether or not we claim him as a dependent.)


I would appreciate any expertise you can share!


Thank you!




2 Replies
Level 15

State of residence for US citizen college student whose parents live outside the US

You're probably not going to get a clear cut answer.


General rule:  a student, who is a dependent of his parent(s) has the same state of residence as his parents.  If you file as a MD resident, he should also.  But even that's not clear, in his circumstances.   If you do not file a resident MD return (i.e. you file a non-resident MD return for the rental income) he's probably safe in not filing a MD return.  

Level 15

State of residence for US citizen college student whose parents live outside the US

@safeinst  said " I don't *think* my husband and I would get much tax benefit from his educational expenses".


Unless your income is too high for the American Opportunity credit (AOTC), you will be better off using the first $4000 of tuition paid for the AOTC, rather than using the 529 plan (or paying tax tax on part the 529 distribution) as the AOTC is a 100% credit on the first $2000 and 25% on the 2nd $2000. 


Furthermore,  there is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.


Room and board are eligible expenses for a 529 plan distribution, but not for the tuition credit or tax free scholarship.  


Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.


Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)


Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

You have $1120 of taxable income  


**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. 

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