Q1. Can Sam file independent or does he still qualify to be Kent’s dependent?
A1. Probably not. The key is that scholarships (incl. ROTC) are third party support and not support provided by the student himself. Distributions from a 529 plan are support provided by the parent (the owner of the plan). The monthly stipend an ROTC cadet gets is tax free and treated as scholarship for the dependent support test.
A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
- He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
- He did not provide more than 1/2 his own support. Scholarships are considered third party support and not as support provided by the student.
- He lived with the parent (including temporary absences such as away at school) for more than half the year
So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.
The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.
The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf
Q.2. Is Sam eligible for the AOTC on his own return?
A.2. Only if he does not qualify as a dependent and is over age 23. If he is a non-dependent, he qualifies for the non-refundable credit, regardless of age. There is even a provision that allows a parent to forego the student’s dependency (and the $500 dependent Tax credit) to allow the student to claim the non-refundable portion of the education credit. But Sam’s income ($13,080 + 5345 -12,400 = $6025 taxable) is so low that there is only a small ($6025 x 10% = $602 tax savings) benefit.
Whether a dependent, or not, a full-time unmarried student, under age 24, is only eligible for the refundable portion (the $1000) of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit.
If he doesn’t qualify as a non-dependent, he also doesn’t qualify for the stimulus/Rebate credit. But, there is a provision (so far) that says he doesn’t have to pay it back if he already got it.
