18 year old claiming herself unemployment income

[Lacorcia2001]

My 18 year old daughter received unemployment and did not have federal taxes withheld, she now has a large tax liability she owes.  Can she file and claim herself as an independent she will qualify for the education and tuition tax credits also the stimulus this will reduce her tax liability.  If we do not claim her can she just claim herself.  Even though her support at this point is half her and half her parents.  Please help!!

[Hal_Al]

Simple answer: No. She still (most likely)  qualifies as your dependent (whether you actually claim her or not) and as such can not file as an independent or claim the education credit and  the stimulus.  

That said, it hinges on "her support at this point is half her and half her parents".

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 (and she does ), 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 she qualifies to claim herself, there are two additional issues, if she was a fulltime student:

1. Unemployment compensation is unearned income for purposes of the "kiddie tax" ( most of her unearned income is taxed at the parent's marginal rate").  Even a non dependent FT student, under 24 is subject to it. 

2. 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 by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. You usually must have actually paid tuition, not had it paid by scholarships & grants.  It is usually best if the parent claims that credit. 

[Lacorcia2001]

Thank you for the quick response!   So we ( her parents) claim her as a dependent  we get the $500 for her, we do not qualify for any education credits due to being over the income limit, nor do we get the stimulus for her

She will file her own taxes, check YES someone CAN claim me and she files using the 1099G as her only income? She will not get the education credit or the stimulus.   She will be liable for the underpayment of federal taxes on her unemployment ( which the option was not available to PUA in Massachusetts until July) 

What are the options for her to pay this tax liability? 

[Hal_Al]

If she owes less than $1000 (federal) there will be no underpayment penalty. 

[Lacorcia2001]

It is more than 1000.  

[Hal_Al]

You can use TT to calculate the penalty and add it to your balance due or you can just pay the calculated tax and let the IRS bill you for the penalty. 

If she filed last year, she may be eligible for a penalty exception, so having TT do the form (2210) is recommended.

In TT enter at:

 Federal Taxes  (Personal in  H&B version)

Other Tax Situations

 Additional Tax Payments

   Underpayment Penalties

[fanfare]

when your daughter files as your college attending dependent,

you enter her 1098-T on your tax return, not hers.

the parents collect the tuition and AOC credits.

[Lacorcia2001]

Thank you,  

We do not qualify for any education credits or stimulus for her as our income is over the limit

If she claimed herself and we did not she would get those credits and the stimulus which would help her ease the burden of the tax liability she has for the underpayment of federal taxes on the unemployment she received.

As her parents we are only eligible for the 500 dependent deduction, her claiming herself would far outweigh the loss of the 500 on our return

[Hal_Al]

Lacorcia2001 said "If she claimed herself and we did not she would get those credits and the stimulus which would help her ease the burden of the tax liability she has for the underpayment of federal taxes on the unemployment she received".

That's not allowed. If she qualifies as your dependent, she is not eligible for the stimulus payment, even if you don't actually claim her. She is also not allowed the refundable portion of the American Opportunity credit, whether you claim her or not.

She is allowed to claim the non-refundable portion of the education credit, if you forego claiming her as a dependent.  You lose $500, she gets het tax liability wiped out (up to $2000) depending on the calculation used.  TT will select the best option.

[Lacorcia2001]

When I entered her information in TT claiming herself, it did ask if she received any stimulus payment, I selected NO and it applied the recovery rebate to her return??

[Hal_Al]

It the personal info section of TT, you have to check that she can be claimed as a dependent. 

[Lacorcia2001]

Thanks  for the help!  

[Opus 17]

If a person can’t be claimed as a dependent, they are eligible for the recovery rebate unless they received a previous stimulus payment. If your child answers “no, I can’t be claimed as a dependent“ then she would qualify for a stimulus rebate. However, this would probably be considered tax fraud.

If she can be claimed as a dependent, she must check the box that says “yes, I can be claimed as a dependent“ even if this increases her tax liability.  Answering “no” to decrease her tax liability is tax fraud.

In 2020, there are two new situations that will drastically affect her tax return. First is the stimulus credit. If she can be claimed as a dependent, she is not eligible for a credit.

Second is the “kiddie tax” and unemployment compensation.  The kiddie tax taxes unearned income in a child’s name at the parent‘s tax rate. This is to prevent parents from putting investments in their child‘s name in order to get a lower tax rate as a tax dodge.  However, unearned income includes unemployment compensation, and the enhanced unemployment compensation during the coronavirus pandemic means that many children who would never have been eligible for unemployment compensation before have received it this year. And that results in children paying a much higher tax rate on their unemployment compensation than they would have normally expected.  Your child is subject to the kiddie tax as long as at least one of her parents is alive, even if you do not claim her as a dependent, unless she can prove that she provided more than half her own living support.

If your child were to answer that no one else can claim her as a dependent and that she did provide more than half her living support (if those facts are untrue), that would be considered tax fraud, and she would be subject to penalties and interest if the IRS audited the situation.

However, regarding the penalty, I do not recommend calculating a penalty or including a penalty payment with her tax return. Simply pay the tax she owes. If the IRS assesses a penalty, you can appeal on the grounds of it being her first time. The IRS should not assess a penalty if this is the first year she has owed income taxes.

[Lacorcia2001]

Thank you!