Hi All
First let me say I've been pretty impressed with the quality of answers to some very specific tax questions. Having said that here is my very specific tax question.
I have a 21 year old full time student who lives away from home (he is home occasionally like major holidays and perhaps a month or so over the summer but mostly lives at school). Because he lives away from home, is over 18 but is a student I think the only test for 'is he is a dependent' is the support question "Did he provide 50% of his support"
The IRS has a handy worksheet here for walking through it. The part I don't understand is how to handle gifts.
Her is an example (numbers made up to illustrate the point)
His Income & assets
He works during the summer (and part of the school year Let's say he makes $17,000 a year) and has a taxable brokerage account in his name that was set up to fund his education when he was very young by some generous grandparents (let's say it's worth $50,000 right now)
Let's say my wife and I gift him $25,000 this year ($12.5k each)
the total money he has access to is
- $25,000 from gifts from mom & dad
- $17,000 from earned income
- $50,000 in a taxable brokerage
His expenses for purposes of the determining support are
- $40,000 in tuition (he has a scholarship of $15,000 and so only pays $25,000 but the total before scholarship is $40,000 so I think you have to use that on the worksheet)
- $15,000 in rent/utilities/books/food/gas, etc "day to day" expenses
- $10,000 in recreation, travel (mostly playing golf probably!)
Expenses Mom & Dad still pay add up to $4,000 a year
- $1200 for car insurnace
- $800 for various family plans (e.g. cell phone, access to the family Netflix account, that kid of thing)
- $2000 as part of family vacations he joins us on
- He has a room here but only stays as a visitor (thanksgiving) and a month or two over summer. I don't think I need to include this?
So the total cost of his support is $40,000 + 15,000+ $10,000 + mom & dad support ($4000)= 79,000 a year
using the worksheet above (or using the IRS tool for determining claiming dependents) it means if he pays 50% of 79,000 or $39,500 then is can NOT be claimed as a dependent but if he pays $39,499 then he CAN be claimed as a dependent?
So far this is all pretty clear -- My question is this: If he spends his earned income ($17,000) and pays the entire tuition ($25,000) he would spend $42,000 and be above the $39,500 and so therefore would NOT be a dependent.
If, however, he pays the same $17,000 from his income but mom and dad just pay the tuition directly of $25,000 then he would NOT be a dependent since he only paid $17,000.
In both cases the amount of Money Mom & Dad is the same -- The difference is how the $25,000 was used, as a gift or paid directly to the school.
The difference is in one case he is gifted his money and the parents hope he makes 'good choices' and uses it for school (but he's not required to) -- He has a sort of free will on spending it. In the second example he had no free will on tuition -- Mom & Dad just paid it.
I think I have this correct but I'd appreciate any feedback..
