Sometimes the answer can be complicated. But with stimulus money on the table and you not qualifying for the education credit, the answer is fairly simple: it's better if she claims herself. You are correct, you only get the $500 other dependent credit.
With the tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, not being a dependent means she can claim the stimulus and education credit. Note: any American Opportunity Credit you claimed when she was a dependent counts toward the 4 time limit for her claiming it. She may have to settle for the lesser Lifetime Learning Credit.
But, then come the question of can she legally do that. If she qualifies as your dependent, she cannot claim herself and the tax benefits that come with that.
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:
- 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)
- he did not provide more than 1/2 his own support (scholarships are considered 3rd party support and not support provided by the student).
- 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
