Best way to file dependent that received unemployment benefits so it won’t badly affect parents’ tax pay? What tax benefits are eligible if filed as dependent versus independent child?

[TaxNavigation]

Sorry to bother, but I am confused on how to file an 18 year old who has received unemployment up to around 31,600. I see some people say that a person is considered dependent no matter what the income is. However, I’ve seen some other posts say that a person can not be filed as dependent if they have too much unearned income from unemployment benefits. 

How should I file an 18 year old under their married jointly parents? Would it be better to file them as independent or dependent?

Which would save more? 
Taking into account possible EIC, EITC, American Opportunity Credits, tax deductions, tax exemptions, and other possible credits or benefits?

Their parents’ income is around AGI is around $41,200. 
Also would using the look back provision be better to help the unemployment money from causing ineligibility for tax benefits? 
2019’s income is slightly higher. 
Would the look back rule apply in this case?

Someone said that filing an 18 Y.O as independent would allow for paying less tax but I am not sure if they took into account possible tax credits / deductions / exemptions / other benefits.

Is it really better to file our 18 y.o as an independent ? Wouldn’t filing them as a dependent save more on taxes?

 I’m really confused because I am not sure how the unemployment benefit income will affect the parents’ taxes and eligibility for tax savings rules.

sorry for so many questions. I am really confused on how to help get the least tax due

@tax Dependant duaghter receives unemployment 18 year old claiming herself unemployment income How to file a Tax Return for a Dependent College Student Child living with us and received Unemploym... 

[Hal_Al]

Q. How should I file an 18 year old under their married jointly parents? Would it be better to file them as independent or dependent?

A. You don't get to choose. He either qualifies as your dependent or he doesn't.  It's not optional.

There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. 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
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. 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

Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12,400), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.  TT will check that box on form 1040.

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

With the tax law change, effective 2018, most people, usually,  will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, you only qualify for an education credit or deduction, if you are not a dependent.  But, for 2020, he will probably qualify for the $1800 (1200 + 600) Recovery Rebate Credit (stimulus) if he claims himself.

You will lose the $500 "Other dependent" Credit. if you do not claim him.  If he is a college student, you could miss out on up to$2500 tuition credi.

Under the CARES Act, if you are claimed, or qualify to be claimed, as a dependent on someone else’s 2019 return you cannot receive a stimulus check, in 2020.   If you qualified as a dependent for 2019, but will not be for 2020, you will most likely get it in 2021, when you file a 2020 tax return.

Note that the requirement is not just whether you are actually claimed as a dependent, it's whether you qualify to be claimed as a dependent. 

[ColeenD3]

An 18 year old is a dependent who must file their return, declaring the dependency It doesn't matter how it works out better. She will also need to file Form 8615.

Qualifying Child

Relationship — the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or step-sibling, or a descendant of one of these.

Residence — has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.

Age — must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.

Support — did not provide more than one-half of his/her own support for the year.

[Hal_Al]

@ColeenD3  Good catch on the "Kiddie Tax" (form 8615).  Because he is under 19 (under 24 if a full time student), his unearned income (unemployment compensation is unearned income) will be taxed mostly at the parents tax rate.  That is true whether he is a dependent or not.  Since the parents are in a low tax bracket (AGI $41k), it will  amount to about $150 more in tax.

[TaxNavigation]

Thank you so much for replying! The18 year old is a college student.

I am seeing posts saying that even if they qualify as dependent, the parents don’t necessarily have to claim them as dependent.

Would it save more if the parents claim the student or to not claim?

If the unemployment of 31,000 counts as unearned income , that doesn’t affect the qualifications to be considered dependent does it?

Is it possible for the student to file their own return but still be claimed as a dependent?

would there be any benefits to not claiming them while they still file their own return?

sorry for more questions ! I’m still overwhelmed with all the different rules

[TaxNavigation]

Would there be any benefits to not claiming the student as a dependent versus claiming them?

such as EIC, EITC credits or any others that might help relieve tax owed?

The student is a full time student with a birthday around October 2002. (I’m guessing that makes them qualify as a dependent. I’m wondering about how claiming or not claiming will affect taxes as well now)

Would the amount owed still be the same whether the student is claimed or not as dependent?

(is filing as independent the same as not claiming the student as dependent ? )

Thank you for taking your time by the way!

@Hal_Al @ColeenD3  

[Hal_Al]

Q. I am seeing posts saying that even if they qualify as dependent, the parents don’t necessarily have to claim them as dependent.

A. Yes that's true and there's even a situation where you might want to do that .  But if he qualifies as your dependent, he still must check the box that says that, on his return,  and that limits what he can claim (no stimulus!)

Q.  Would it save more if the parents claim the student or to not claim?

A.  It appears that the family will come out ahead,  if he is not claimed as a dependent. 

Q. If the unemployment of 31,000 counts as unearned income , that doesn’t affect the qualifications to be considered dependent does it?

A.  No.  It's not the source of the income or even the amount that governs dependency.  It's how the money was spent.  College expenses are support (except if paid by scholarship).

Q. Is it possible for the student to file their own return but still be claimed as a dependent?

A. Yes. Answered above. He can and must file a return.  He checks the box that says he can be claimed as a dependent.

Q. Would there be any benefits to not claiming them while they still file their own return? 

A.   It's complicated, but basically answered in the first question. 

Q.   I’m still overwhelmed with all the different rules.

A.  You need to run the support calculation, to see if he still qualifies as your dependent and file accordingly.

http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

[Hal_Al]

  Yes, you get EIC if he is your dependent.  If your $41K  AGI is all earned income, that's about $900 EIC. The above answer has been revised to reflect that.

(Revised 5-18-21) There's an obscure special rule: You may claim EIC on a child who is not your dependent, if the only reason, for not being a dependent, is that he provided more than half his own support.  You will get the EIC even if he claims himself.

[TaxNavigation]

I’m assuming taking into EIC into account makes claiming the student as dependent saves more in tax liability? 

Sorry if this is an ignorant question but will EITC  be able to be applied to the parents as well ?

What if the student isn’t claimed, is the student able to get EIC or EITC or any other credits or benefits that would make it better to be unclaimed versus claimed?

Are there any other tax rules that might help save on taxes in this case? 
@Hal_Al 

(if the student spent their unemployment, would that mean they are no longer considered a dependent or just that they can’t be claimed anymore...? How would it affect eligibility for the EIC, AOC, etc? Kiddie tax won’t be affect by this as well would it?)

[TaxNavigation]

Sorry to bother again but may I ask if it would still be the parents favor if the student is claimed as dependent if we take into account the look back rule ?

I am not sure if I am understanding the look back rule correctly, please correct me if needed.

I was wondering if the look back rule will allow the parents to use 2019’s income to determine EIC/ EITC (are they different ?) to get a higher EIC since I thought the student’s unemployment benefits of 31,000 might be causing the EIC to only be 900$? 
The parents’ 2019 AGI is 41,600 so slightly higher than in 2020.

And if we are considering the look back rule, would that allow the student to claim EIC/ EITC since their 2019’s income was around 1,300 and none in 2020?

How will this look back rule affect whether claiming the student will save more or not?

is the unemployment exclusion of around $10,000 still effective on the student’s unemployment benefits if the student is claimed as dependent?

What happens if the dependent box mark on the student’s return is forgotten to be marked? Would that affect anything? 
One being able to claim AOT? 

Another being that kiddie tax won’t apply anymore?

@Hal_Al 

[Hal_Al]

Q. EIC/ EITC (are they different ?) 

A.  It's just one thing with two ways of saying it: Earned Income Credit or Earned Income Tax Credit 

Q. I thought the student’s unemployment benefits of 31,000 might be causing the EIC to only be 900$? 

A. No. The dependent's income is irrelevant to the EIC on your tax return.  What is relevant is that you must claim the dependent to get any EIC in 2020, whether you use 2020 or 2019 income.

Q. I am not sure if I am understanding the look back rule correctly.

A. Your income is too high to use the look back rule. The basic EIC works on a "bell curve," rising as a worker's wages rise reaching a maximum when annual earnings are between about $10,000 and $19,000 (Married with 1 child) and then declining gradually until it phases out altogether. If your income is on the up slope of the EIC curve more earned income will increase your EIC but if your income is on the down slope, more income (of any kind) will reduce you EIC. You're on the downslope. See the curve (graph) at:

http://www.taxpolicycenter.org/briefing-book/key-elements/family/eitc.cfm

Q. Would that allow the student to claim EIC/ EITC since their 2019’s income was around 1,300 and none in 2020?

A. No.  People, under 25, without kids, are not eligible for EIC.  

Q. How will this look back rule affect whether claiming the student will save more or not?

A.  Not at all, even if you were on the up slope of the EIC curve.  There is little or no EIC without a qualifying child dependent

Q. Is the unemployment exclusion of around $10,200 still effective on the student’s unemployment benefits if the student is claimed as dependent?

A. Yes. He gets it either way

Q. What happens if the dependent box mark on the student’s return is forgotten to be marked? Would that affect anything? One being able to claim AOT?  Another being that kiddie tax won’t apply anymore?

A. If he qualifies as a dependent and doesn't check the box, he'll be committing of tax fraud.  If he does not qualify as a dependent (or if you forego claiming him) he can still only claim the non-refundable portion of the AOC ($1500 max) because of a special rule for full time students under 24.  The kiddie tax is still applicable, regardless of dependency (another full time students under 24 special rule).

[TaxNavigation]

I am sorry yet to bother again...

My brain is having a hard time to understand.

Would the amount of tax that need to be paid be more if the parents claim the student dependent versus if they did claim the student ? And what if the student isn’t a dependent ?

I am wondering how the taxes that need to be paid before considering the credits and deductions (do they even qualify for any?) or any eligibilities to save on tax will compare for the different cases:

-if the student’s unemployment benefits of around $31,600

(after the exclusion of $10,200 will be applied even if under the parents’ claim?)

will add to the parents income and end up causing the taxes that need to be paid to be higher 

(My thought process that might be using the wrong items?:

(the unemployment benefits + the parents AGI ) x tax )

Versus

-the amount to be paid from the student’s unemployment after the $10,200 exclusion since they have no earned income to add to before applying tax.

(31,600 - 10,200) x tax should be less to be owed than above?

I am not sure if I am processing this right.

If the tax savings are more when claiming the student as dependent, won’t it end up not being as beneficial in the end if the amount owed is more than when not claiming the student as a dependent?

since the tax savings are just to deduct from how much tax is owed?

Am I missing any possible eligibilities that will help in having more refund and less tax liability?

I am confused on what the end result would be for different cases or when the student is claimed or not, or when the student is not claimed and not dependent because of being able to contribute to support. 
What will help the end amount owed and refunds the best?

If my questions don’t make sense, please let me know! My mind is a knot trying to understand it all.

Thank you by the way for being so patient and so helpful so far! It really makes me feel less alone in trying to navigate through these tough sea of tax rules! I really appreciate all the help so far.

@Hal_Al 

@Hal_Al 

[Hal_Al]

A couple of more things:

As a dependent, with unearned income, he only gets an $1100 standard deduction. A non dependent gets the full $12,400. This means about $1200 more tax as a dependent.

As a non-dependent, his tax liability  will not be large enough to get the full $1500 non-refundable portion of the AOC.  It'll be about $600 less. 

Net $600 in favor of being a non-dependent. 

Q. Would the amount of tax that need to be paid be more if the parents claim the student dependent versus if they did claim the student ? And what if the student isn’t a dependent ?

A. It's gotten too complicated for a simple answer. It would be best to prepare taxes both ways (for both the parents and student) and compare results, before deciding.   But, again, it is not optional.  If he provided more than half his own support, in 2020, he cannot be your dependent. If he did not, and qualifies as your dependent, he is not allowed to file as a non-dependent.  

Q. If my questions don’t make sense, please let me know! 

A. Your new questions don't make sense.

   -None of you dependent's income goes on your return, either way.

    -Nothing about your dependent's income affects the calculations on your return. The only thing that affects your return is if he is claimed as a dependent or not.

    -On his return, you do not "add the parents income".  You only apply the parent's tax rate.  There's only a 2% difference between your rate and his and it is only applicable to part of his income. The "kiddie tax" (about $150) gets applied whether he's a dependent or not; so it's not a factor in your decision.

[Hal_Al]

I think it  just got easier.

There's one more obscure special rule I had forgotten: You may claim EIC on a child who is not your dependent, if the only reason, for not being a dependent, is that he was self supporting.  You will get the EIC (closer to $1050, rather than $900) even if he claims himself.

It appears that the family will come out ahead by about $1800  if you do NOT claim him as a dependent, but do claim him for EIC.  The TurboTax software can handle this situation.