First of all, any person who has income from working must file a tax return in their own name. This does not, by itself, stop the child from being claimed as your dependent. That depends on all the facts and circumstances which the other answer has covered in detail. If the child can be claimed as a dependent, they must answer “yes, I can be claimed as a dependent by another taxpayer“ on their tax return, and this will affect some of the tax provisions available to them.
The only time a child‘s income would be included on a parent‘s tax return is in certain types of investment situations. If your child‘s income is less than $12,400, they would not be required to file a federal tax return, but they might be required to file a California state tax return, and they would certainly want to file a tax return to get a refund of any federal withholding.
Your son’s state tax situation could be complicated, and it may affect whether he is eligible to be claimed as a dependent.
There are two general principles here. First, the resident of a state is required to file a tax return and pay income tax on all their worldwide income in the state in which they live. If a person is temporarily living and working in another state, they owe a non-resident tax return to that state which will report on in-state income only, then they also file a resident tax return for their home state that reports all their income. Their home state will give them a tax credit for taxes they paid on the non-resident return in the state where they live. Texas does not have an income tax, so your son will only be required to file a California state full year resident return.
The reason I say he will be required to file as a California resident is that being away at college is usually considered a temporary absence. In order to be a permanent resident of Texas, your son would have to establish a full domiciliary relationship to the state of Texas. Your domicile is your permanent home. It is the place where you have the strongest connections. There is no single factor, but some of the factors that determine where your domicile is are where you live, where are you are registered to vote, where where you have a drivers license, significant social relationships, your doctor, your bank, your church, and so on. It is possible to live away from your main home for a long time without actually giving up your domicile. Establishing a new domicile also requires taking active steps to abandon your previous domicile.
All that being said, most of the time, college students are still domiciled with their parents. College living arrangements tend to be temporary, even when students are living in separate apartments. If your son has not abandoned his California domicile, then he is a state resident of California for income tax purposes and will file a California state tax return for all his worldwide income.
However, if your son can argue that he has permanently abandoned his California domicile and established a new domicile in Texas, then he is a Texas state resident. He would file a California nonresident return to only pay California tax on income earned while he was staying in California. Normally, he would file a Texas tax return to pay tax on all his worldwide income, but Texas does not have state income tax.
But if your son has abandoned his California domicile and established a new permanent domicile in Texas, then you can’t claim him as a tax dependent. You can’t enter his 1098–T on your tax return and you don’t qualify for the education credits. He would enter his 1098T on his own tax return, but he won’t qualify for any any actual tax benefits because his income is currently too low to benefit from the American opportunity tax credit or the lifetime learning credit.
Bottom line is that he can’t be a Texas resident to avoid California income tax and also be your dependent.
