Dependent's taxable scholarship in Turbo Tax

[Hal_Al]

Q. In general, is there a borderline of wages and earned income in order a college student to be considered independent or as long as he is under 24 and with scholarships he is considered dependent?

A. No. It doesn't matter how much income a full time student, under 24, has.  

To be able to file, as independent, what matters is how much he spent on support.

Even if he's independent, there's an additional requirement that his support come from his earned income, to qualified for the refundable portion of the AOTC. 

[MK151]

Got it and thank you for helping.

[MK151]

One more follow up question - if he qualifies as dependent, but not actually claimed as one, would that allow him to use the nonrefundable part of the edu credit using your suggested calculation above and therefore reduce the taxes he owes? I read somewhere in another discussion here that even if they are eligible to be claimed as dependent, but the parent chooses not to claim them, then they can qualify for the nonrefundable part of the credit, not sure if that would apply in this case.

Thank you.

[Hal_Al]

Q. If he qualifies as dependent, but not actually claimed as one, would that allow him to use the nonrefundable part of the edu credit using your suggested calculation above and therefore reduce the taxes he owes?

A. Yes. And TurboTax will allow when it sees the not claimed box checked.

Technically there is a provision that allows your student-dependent to claim a federal tuition credit. For most people, it seldom works out.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)

[MK151]

Thank you. So that only would make sense if it will reduce his tax liability by more that the $500 dependent credit the parent would get if claiming him as dependent? It might in our case since he has self employment income that will owe taxes on it as well. Either way, do parents need to file their return first and then send the dependent return?

Thank you for answering my questions.

[Hal_Al]

Q. So that only would make sense if it will reduce his tax liability by more that the $500 dependent credit the parent would get if claiming him as dependent?

A. Yes.

Q. It might in our case since he has self employment income that will owe taxes on it as well?

A. Probably not. The credit can only be applied against income tax.  It can not be applied against his self employment tax, included  on line 23 of his 1040. " Self employment tax" (SET) is how the self employed pay social security and Medicare tax. Look at his line 18 on form 1040 for his max credit. 

Q. Either way, do parents need to file their return first and then send the dependent return?

A. No. Neither has to actually be sent first, as long as the 2nd one sent agrees with the first. 

[MK151]

Got it, thanks. He is still waiting for another 1099(small) and once all is entered I will have the actual line 18 amount to compare. I might reach out again if any other question comes up.

Thank you for your professional help.

[anonymouse1]

We're trying to do some tax planning for 2025 since we, the parents, are not likely to get much from the AOTC even if we qualify (income too high).

We have paid $12.600 in tuition, room and board for spring 2025.  Our 21-year old got a $4000 scholarship.  She has a summer job lined up which includes housing, she expects to gross about $9000 and will pay for her own groceries.  She doesn't have a car.  She is on the family medical and dental plan, I don't know if we have to include a portion of our premiums (1/3?) as being paid (by us) for her support.  If she has say $10,000 in tuition for the fall, and gets another $4000 scholarship, then pays (I have to ask how much her lease says) $3000 in rent by the end of the year, and another $1000 in groceries, how do we figure how much we paid for her support vs how much she paid, and how do we account for the provided (I assume nontaxable) housing this summer?

Would it be best to have her 529 pay $6000 directly to the school for fall tuition ($10,000 - $4000 scholarship), then claim the scholarship ($4000 or $8000?) as taxable income, and then would she be able to take $4000 out of the 529 to pay rent and groceries, or does she need to pay them out of her earnings in order to claim a refundable AOTC?

I'm figuring that even if her summer housing doesn't count towards support for anyone, if she claims $4000 in scholarships as taxable income, and that scholarship is used to pay for tuition, that she will have earned income of $9000 and taxable income of $13,000, and she would have paid (out of the 529, but that counts as being paid on her behalf?) $14,000 which is more than what we paid for her support (including tuition, food, and housing) so that $14,000 in the fall plus whatever she spends on groceries over the summer is more than half her support and she can claim the AOTC as an independent filer?  Would she want to claim the spring scholarship as well (so $17,000 income)?

[Hal_Al]

Bottom line: she is not eligible for the AOTC. 

She is not eligible for the refundable portion because the rules specifically exclude her.*  She is not eligible for the non refundable portion because she will not have enough income (less than $14,600) to have a tax liability. 

There are two support issues: 1. support for being a dependent and 2. earned income support for the refundable portion of the AOTC.

The taxable scholarship is not support in either case. Only the $9000 working income counts as earned income for the AOTC.  

It's unlikely that she is self supporting for the dependency issue and almost certainly not for the AOTC.

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

Scholarships and support  https://ttlc.intuit.com/community/college-education/discussion/re-calculating-support-with-scholarsh...

*A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself with work money. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit. 

You cannot claim the (up to) $1000 refundable credit if you are, or can be, claimed as a dependent by someone else.

Reference: Line 7 instructions for form 8863.

https://www.irs.gov/instructions/i8863#en_US_2024_publink53002gd0e674

[anonymouse1]

So even if she claims $8000 in scholarship money as taxable, that doesn't get her over the $15000 (for 2025) standard deduction?  As far as support, if she only actually lives in this house for 4 weeks out of the year, because she's living in the dorm for the spring, housing at a nature refuge for the summer, and an apartment for the fall, and we only paid for the spring dorm, she's not supporting herself?  Do we figure the cost of housing (no mortgage, and I read that real estate taxes aren't counted) divided by 4 (her brother lives with us full time) for just the weeks that she's actually here and not at school or her summer job?  It doesn't seem right to count a full year of our housing costs (basically only utilities if real estate taxes aren't counted) and certainly not our grocery bill (divided by 4) for the whole year, if she's also paying rent and buying her own groceries for the majority of that time.

[Hal_Al]

Q. So even if she claims $8000 in scholarship money as taxable, that doesn't get her over the $15000 (for 2025) standard deduction?

A.  She is not eligible for the refundable portion, period.  It makes not sense to report more taxable income so that you can have a tax liability to wipe out when you had no tax liability to start with. 

A student away at college is considered as living at home, the whole year (she is temporarily absent) for purposes of the support calculation and the living arrangement dependent test.  The value of the home, as support,  is the fair rental value plus utilities.  

[anonymouse1]

So no refundable part, I can see that, but if she has any tax liability at all could she get the nonrefundable part?  Again, I'm not sure if she will have any tax liability for 2025, I don't think so if the standard deduction is $15,000 because she won't earn more than that unless she claims her scholarships (which is a strategy even the IRS says can be used to claim the AOTC).  But what about 2026 when she graduates?  If she earns more then (knock on wood), would we still have to claim 1/4 of our household expenses as going toward her support, even if she's paying her own rent and groceries ALL year, including the spring semester?

This is very confusing how someone can be living somewhere practically all year and paying rent, groceries, and utilities, and for the same period of time is also counted as being a member of the household, down to even splitting the grocery bill.

On the other hand, I printed out that worksheet for support and will look at it to see if her brother (who lives with us and doesn't pay room or board) can be considered "other dependent" but I thought there was a maximum income he could earn and over that we can't claim to be supporting him?

[Hal_Al]

Q. But I thought there was a maximum income he could earn and over that we can't claim to be supporting him?

A. There are two types of dependents, qualifying child (QC) and qualifying relative (QR).  There is no income limit for QC. Full time students, under 24, are QC. There is a $5050 (for 2024) income limit for QR. 

See full dependent rules at: https://turbotax.intuit.com/tax-tools/tax-tips/Family/Rules-for-Claiming-a-Dependent-on-Your-Tax-Ret...

Q. For graduation year, Would we still have to claim 1/4 of our household expenses as going toward her support, even if she's paying her own rent and groceries ALL year, including the spring semester?

A. No, only for the time she was still a student (Jan to graduation day, or when she moves out, or starts paying rent).

Q. Down to even splitting the grocery bill?

A. No, just the housing.

Q. But what about 2026 when she graduates? Can the student be claimed as a dependent in the Graduation year? 

A. (answer written as if the parent asked the question)

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. 

There are two types of dependents, "Qualifying Children"(QC) and Other ("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. Only a QC qualifies a taxpayer for the Earned Income Credit.

The rule is that a child of a taxpayer can still be a “Qualifying Child” dependent, regardless of his income, if:

1. 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)
2. he did not provide more than 1/2 his own support  (scholarships are considered 3rd party support and not support provided by the student). 
3. 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 2026.

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.