Worth filing for 21 year old college student?

[Eli923]

This is the first year that I cannot claim my 21 year old daughter as a dependent. This is due to her taking loans and paying tuition for grad school on her own. Accordingly, I removed her from being listed as a dependent on our return.

Here's what she's got:

• W-2s totaling about $2,000 (with only about $30 withheld for federal taxes)
• 1098-T totaling about $19,000

To keeps things simple for the purpose of this question, let's assume that's the whole picture. And it's my understanding if a single person earns under $12,400, they don't need to file.

Would the picture presented above get her a sizable refund or am I wasting my time to file for her?

How would I determine whether I need to file a state (IL) return for her, as well?

[DoninGA]

Loans used tuition are not earned income.

You should be able to claim her as your dependent under the Qualifying Child rules if she meets all the requirements.

To be a Qualifying Child -

1. The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
2. The child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student or (c) any age and permanently and totally disabled.
3. The child must have lived with you for more than half of the year. Temporary absences while away at college are considered living with you.
4. The child must not have provided more than half of his or her own support for the year.
5. If the child meets the rules to be a qualifying child of more than one person, you must be the person entitled to claim the child as a qualifying child.
6. The child must be a U.S. citizen or U.S., Canada or Mexico resident for some portion of the year.
7. The child must be younger than you unless disabled.

[Eli923]

I know the loans aren't considered income, but with the money from those loans, she paid ~$19k tuition. We did not co-sign on the loans.

In another thread, DawnC advised that tuition paid is considered towards calculating who paid for half of her support. So she is paying ~$19k towards tuition and we're paying ~$9k towards her support. (Included in that $9 is her portion of potential rent, utilities, clothing, gas, etc.)

I figured she's paying ~$19k and we're only paying ~$9k so we can't claim her as a dependent.

Am I wrong?

[DoninGA]

Use this IRS Support Worksheet to determine support - https://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

[Eli923]

I (roughly) did use that worksheet. Under the section called "Expenses for the Person You Supported", it says:

     15. Enter the person's total education expenses

So my question is does the ~$19k tuition that she paid from the loans she took go in there?

If so, am I correct that I cannot claim her?

[DoninGA]

Let me ask our other volunteers who are quite knowledge on education issues when it comes to support -

@Hal_Al or @Opus 17 would either of you care to weigh in on this question of education loans as a means of support

[Opus 17]

Loans taken out in the student’s name count as support the student provides themself.  

[Eli923]

Thank you, @Opus 17!

Ok, sounds like you're agreeing with my summary:

I figured she's paying ~$19k and we're only paying ~$9k so we can't claim her as a dependent.

So getting back to my original questions:

1. Would the picture presented above get her a sizable refund or am I wasting my time to file for her?
2. How would I determine whether I need to file a state (IL) return for her, as well?

[Hal_Al · Accepted solution]

Yes, the $19k tuition that she paid from the loans, is support she provided for herself. So, yes, you probably can't claim her as a dependent.  If she is the sole borrower (the parent did not co-sign) then that is her money, for purpose of the support calculation.  Scholarships are treated differently.  That is third party support and not support she provided. 

Back to your original question; is it worth filing? This year yes (any other year, maybe  not). Since she can (most likely) no longer be a dependent, she is eligible for the $1800 stimulus/recovery rebate.

Grad students are not eligible for the refundable tuition credit.

There are two types of dependents, "Qualifying Children"(QC) and standard ("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. Only a QC qualifies a taxpayer for the Earned Income Credit and the Child Tax Credit. They are interrelated but the rules are different for each.

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.