@TAM2024 wrote:
Well, she lives on a college campus. Her parents are supplying all of her support. So you are saying that she can make as much income as she can and take money from her inherited IRA (no limit.). ?? Correct?
thanks so much !!
Well, there will be income tax, of course. And this income will likely be taxed at a higher rate than usual due to the "kiddie tax" as long as she is a full time student under age 24.
https://www.irs.gov/taxtopics/tc553
The issue for her tax return is how to answer "Can I be claimed by someone else as a dependent?"
She can be claimed if she
a. lives "at home" for more than half the year. We already discussed how most, but not all, college students are considered to live "at home" for this test.
b. Provides less than half her own support. So now I would ask, if she withdraws money from the IRA, what is she using it for that is not her own support? Support includes tuition, room and board, medical care, clothing, entertainment, travel, and so on. If she buys a car, that is supporting herself. If she buys fancy clothes or takes a world cruise, that is support.
To give an exaggerated example. Suppose her tuition, room, board, travel and entertainment is $60,000. Because she lives "at home", you can count a 1/3 share of your household expenses as support for her, let's say that's another $10,000. So her costs are $70,000 per year. As long as she pays $34,999 or less, she does not provide more than half her own support. Suppose she withdraws $90,000 and buys a brand new Lucid EV. That makes her support cost for the year $160,000, and she did pay more than half ($90,000) so she can't be claimed as a dependent. Suppose instead she withdraws $90,000 and buys a Lucid for her romantic partner. That's not support for herself, so her support costs are still $70,000 and as long as she pays less than $34,999, she can still be a dependent, even though she dropped $90K on a car for someone else. (I frankly would cut off a child who was that irresponsible, but that's a different problem.) The support test is based on who pays for support (living expenses) and does not consider spending on other people's living expenses.
See publication 501 for all the rules.
