Tax credits and deductions for students

[cdibuff]

My son has a college bill of about 30,000 for TY 2021. I have paid about 15,000 of it and he has paid 15, 000 of it directly. He is 18 so I claim him as a dependent. However, he has income of about 40,000 for this year.

Could someone please tell us what tax, credits deductions AOTC, LLC etc can each of us claim (we as parents on our taxes and he as a tax filer for his 40K income for 2021).

We understand that double dipping is not allowed. However, what happens when we shoulder half the college expense and he does the rest? Our income is around 90K joint so we certainly do benefit from any of these deductions or credits.

Thanks in advance for your help..

[xmasbaby0]

The person who claims the student as a dependent is the one who can get the education credits.   A dependent cannot claim an education credit.   Since he is younger than 24 he can be claimed as your dependent no matter how much he earned if he was a full-time student. You are the ones who can get the AOC.    He cannot claim education credits himself.

You cannot get more than one education credit----you do not get to take both the AOC and the LLC --- the AOC is likely the best one for you to take since there is a refundable portion.   But TT will show you which one is better for you.

But he can/should file a tax return and say on his return that he can be claimed as  dependent in order to seek a refund of tax withheld from his pay.   

https://ttlc.intuit.com/questions/3262983-who-is-eligible-to-take-the-american-opportunity-tax-credi...

You can see your AOC credit on line 29 of your 2020 Form 1040

https://ttlc.intuit.com/questions/1901526-what-s-the-income-limit-for-the-american-opportunity-and-l...

https://ttlc.intuit.com/community/credits-and-deductions/help/what-expenses-qualify-for-the-lifetime...

https://ttlc.intuit.com/questions/3262984-who-is-eligible-for-the-lifetime-learning-credit

https://ttlc.intuit.com/questions/1901172-what-education-tax-credits-are-available      

https://www.irs.gov/help/ita/am-i-eligible-to-claim-an-education-credit

[rjs]

I think @xmasbaby0 missed the fact that your son's income is around $40,000. With that much income, he must file a tax return. It's not optional. And he will not get a full refund of all the tax that was withheld from his pay. With that much income, he has to pay some income tax.

[VolvoGirl]

Will he get a W2 or 1099 for his income?  Are they taking taxes out of his pay?

[cdibuff]

He will get 1099s and no tax deductions 

[VolvoGirl]

Yikes.  1099NEC is for self employment income.  Does he have any expenses he can write off?  He better be sending in estimated payments so he doesn't owe too much and have a penalty.

Sole proprietor, self employed, independent contractor,  freelance, etc.  are all the same thing.  You are self employed and have to fill out schedule C for business income.  You don't have to have an official business set up.  You and the business are one and the same.  YOU are the business.

Yes you are the owner of your own self employment business.  You are in business for yourself.  Use your own info.  The people or company that pays you is your customer or client.  You need to fill out schedule C for self employment business income.  You are considered to have your own business for it.  YOU are the business.

Unless you set it up as a corporation or partnership or LLC S corp you file it as self employment.

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax.  Here's a Schedule C  https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

You can enter Self Employment Income into Online Deluxe or Premier but if you have any expenses you will have to upgrade to the Self Employed version.  How to enter self employment income

https://ttlc.intuit.com/community/self-employed/help/how-do-i-report-income-from-self-employment/00/...

For the future, you should use a program like Quicken or QuickBooks to track your income and expenses.  There is a QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Online Self Employed  return....

http://quickbooks.intuit.com/self-employed

You will need to keep good records.  You may get a 1099NEC at the end of the year if someone pays you more than $600 but you need to report all your income no matter how small and if you don't get the 1099NEC.

You use your own records.  You are considered self employed and have to fill out a schedule C for business income.   You use your own name, address and ssn or business name and EIN if you have one.   You should say you use the Cash Accounting Method and all income is At Risk.   

After it asks if you received any 1099Misc or 1099NEC it will ask if you had any income not reported on a 1099Misc. You should be keeping your own records.  Just go through the interview and answer the questions.   Then you will enter your expenses.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 Schedule 2 line 4 which goes to 1040 line 15.  The SE tax is in addition to your regular income tax on the net profit.  You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040 Schedule 1 line 14 which flows to 1040 line 8a.  Turbo Tax automatically calculates the SE Tax and Adjustment.

Here is some IRS reading material……

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

ESTIMATES

You must make quarterly estimated tax payments for the current tax year if both of the following apply:

- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:

    90% of the tax to be shown on your current year’s tax return, or

  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year you start with your current return, but be careful not to change anything.  For Online versions, if you can't get back into your return, Click on Add a State to let you back into your retun.

You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

Or Go to….

Federal Taxes or Personal (Desktop H&B)

Other Tax Situations

Other Tax Forms

Form W-4 and Estimated Taxes - Click the Start or Update button

Here are the blank Estimates and instructions…..

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

[VolvoGirl]

Oh and on his return be sure he checks the box that says he can be claimed on someone else's return as a dependent.

[Carl]

If on Dec 31 of the tax year the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as a full time student for any one academic semester that begins during the tax year, (each institution has their own definition of a full time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

Then:

The parents qualify to claim the student as a dependent on the parent's tax return . Period, End of Story.

Take note that in the above requirements there is no mention of the student's income. The student could literally earn a million dollars and still qualify as a dependent on the parent's tax return.

Understand that the key word here is "QUALIFY". It does not matter if the parents actually claim the student as a dependent or not. If the parent's "qualify" to claim the student, then the student must select the option for "I can be claimed on someone else's tax return" when the student files their own tax return.

Since your student has more than $12,600 of earned income, the student is "required" to file a tax return.

Your student is not eligible for any of the education credits. (If any 529 distributions are involved here, there's a work-around that *MIGHT* apply. It depends on to many factors to cover at this time.)

[Hal_Al]

As others have said, the education credit goes to the person claiming the student's exemption.  So, the reay question is: can you claim an 18 year old with $40K income.  Answer: probably.

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.

You say he's getting a 1099-S.  The amount on a 1099-S is not income; it's the gross sales amount (1099-S is for real estate sales).  The income is the profit (capital gain) made on the sale.  Furthermore, it's unusual for an 18 yr old dependent to be getting a 1099-S.  Do you really mean a 1099-NEC or some other 1099 (1099-B is for stock or mutual fund sales, but, again the amount on a 1099-B is gross sales and not taxable gain.

[Opus 17]

Recap:

1. Who claims the education credits?  You, if you claim him as a dependent.  Himself, if he can't be claimed as a dependent.

However, there is an exception to this rule.  In some cases, a child can claim the AOTC in their name even if they are a dependent.  This usually only makes sense when the child has a significant income from working (he does) and the parents are not able to get the AOTC due to a high income.  To use this provision, the parents do NOT claim the child as a dependent.  The child answers "can you be claimed as a dependent?" as YES, and then to the follow-up question, "will the person who could claim you actually claim you this year" answer NO.  This question only affects the AOTC.  The child will still be treated as a dependent for other purposes (not eligible for a stimulus rebate, for example.)

2. Can he be claimed as a dependent?  Yes, if you provide more than half his living expenses.  You will have to add everything up on both sides.  His living expenses include tuition, room and board at college, medical insurance, clothing, travel and entertainment.  His living expenses also include a percentage of your housing expenses (rent or mortgage, food, utilities, etc.) considering that he still "lives at home" for tax purposes.   Expenses you pay for include any direct support for tuition and living expenses plus the value of housing you provide in your home.  Expenses he pays for includes any expenses he directly pays, plus any student loans in his name.  His own earnings count as support he provides himself if he pays his own expenses but do not count as support if he saves the money or provides support for other persons (like a partner or child).  There is a worksheet on page 15 to help you out. https://ttlc.intuit.com/community/forums/replypage/board-id/205/message-id/219533

3. What about his own income?  He must file a tax return in his own name for all his income, including income earned from working.  If he receives income for providing a service, it will be reported as "Self-employment" income as he is considered to be his own small business, even if he is just doing Uber and Doordash as an independent contractor, he is still considered a small business.  This will normally be reported on a 1099-NEC, if he is paid more than $600.  But, he must report all his self-employment income even if it is not on a 1099-NEC, such as cash tips or small jobs that don't issue a 1099.

He will owe 12% income tax on net earnings over $12,550 and 15% self-employment tax on all his net earnings after deducting expenses.   He is required to make estimated payments to the IRS 4x per year.  If he over-pays he gets the difference as a refund.  If he skips the estimated payments or under-pays, he can be subject to penalties and interest even if he pays in full at tax time.  If this will be the first time he has owed a penalty, he can request a one-time abatement (cancellation) of the penalty.