Doing some preliminary year end review, it appears that we come out ahead if I don't claim my full-time college student child as my dependent – for 2023 tax year only. I want to know if this approach is allowed and not subject to any flags.
Me: married filing jointly in California. Daughter: 2nd year undergrad full-time college student attending a California university, not living at home. Her earned income was $2300 from summer jobs, no other investment income. She will have income from 'excess' 529 distributions toward college expenses which she is the beneficiary (excess due to withdrawing for scholarships as well). Since the 529 has paid for her expenses, she has arguably paid more than half of her own expenses, hence could be considered independent, right?
Why am I exploring this option? I qualify for Fed's EV tax credit of up to $7500 based on the amount of my tax liability of course (which is less than that).
a) If she is my dependent, the AOTC will go into my tax return and I will get very little of the Fed EV tax credit. And she will owe taxes because of the income from the excess 529 distribution. If I increase my capital gains (from investments or Roth conversion), then my State tax liability increases – not an ideal approach.
b) If she is NOT my dependent, the AOTC will go on her tax return (instead of mine) and hence a refund to her, and I will also receive a much bigger EV tax credit. Overall, both of us combined will come out ahead.
So back to the original question: Am I allowed to NOT claim her as my dependent? Other suggestions?
Caveats and another question:
* Since TurboTax is half baked at the time of this writing where some forms such as EV, 1099-B etc. are not available yet, my calculations and assumptions will be off.
* State: Am I allowed to claim her as my dependent in my State return, even if I didn’t do so in Federal? Will it flag my return? This will impact my State’s tax liability amount.
Using Windows desktop installed TurboTax deluxe. TIA
