There are two distinctly separate and unrelated parts when dealing with a college student dependent.
Part 1 - Determining who can claim the student as a dependent.
Part 2 - Determining who can claim the education credits and deductions.
Your post seems to be questioning Part 1, the dependency question. So let me clarify that. The IRS rules state:
If the STUDENT does NOT provides MORE than 50% of the STUDENT'S OWN SUPPORT, then the parents ***QUALIFY*** to claim that student as a dependent on the parent's tax return. Scholarships, grants, 529 funds, gifts from Aunt Mary, etc. DO NOT COUNT for the student providing their own support.
The key word in the above is QUALIFY. It does not matter if the parents claim the student or not. If the parents *Q*U*A*L*I*F*Y* to claim the student, then the student MUST select the option for "I can be claimed on someone else's tax return". The parents have a choice to claim the student or not. The student does NOT have a choice.
There are only two possible ways that the student can provide more than 50% of their own support, and with both ways it's perfectly possible that no matter what, it's physically impossible for the student to provide more than 50% of their own support.
1) If the student has a W-2 job or is self-employed during the tax year, and earns enough money during that same tax year to have provided more than 50% of their own support.
2) The student is the primary borrower on a qualified student loan, and sufficient funds were distributed to the student during the tax year for them to have provided more than 50% of their own support in that same tax year.
Now, even with both scenarios above, it's perfectly possible for the student to have earned a million dollars in the tax year, yet still not have provided more than half of their own support. First, one must define "support". The IRS defines support as:
Qualified education expenses (tuition, books, lab fees)
Housing (to include cost of utilities)
Food
Clothing
Transportation
Entertainment
So lets assign some realistic values to those categories for the average college student in their junior year of college.
Qualified Education Expenses - $7000
Housing - $14,400 (rent/utilities at $1600/mo for 9 months. The three summer months count for nothing since the student was not enrolled as a full time student for the summer semester. Instead, the student returned home to parents house and worked a summer job during that time.)
Food - $4000 (college food plan at $2K per semester for the fall semester Jan-May, and the spring semester Sep-Dec)
Clothing - $1000. That amount is probably on the high side of realistic. But for this example, so what.
Transportation - $5000 (Student purchased a "beater car" with money earned the previous summer and paid $4K cash for it, with the other $1.3K going for insurance, and another $700 for gas for the year.)
Entertainment - $1500. So what if the student took a summer cruise that cost $5K? The IRS would disallow that as "extravagant" for a college student anyway. So $1500 for the year for the 9 months the student was enrolled as a full time student is actually the high side of what I would call "realistic" entertainment expenses for someone who needs to spend most of their free time studying anyway.
So for the calendar year that brings the student's total "cost to exist" to $32,900 for the entire tax year. Now, if the student doesn't have "at least" $16,450 of earned income or borrowed money from a qualified student loan in that tax year, then you can stop here. With less than $16,450 of student income, there is no physical way possible the student provided more than half of their own support. Mathematically impossible. So lets say the student earned $100,000 for the sake of this discussion. How is it possible that the student "still" did not provide more than half of their own support? Using the same above expense figures, consider the following received by the student during the tax year.
$7000 in scholarships/grants. This paid the "qualified" education expenses of tuition, books and lab fees and was therefore tax free.
$18000 in 529 funds. This was used to pay for the unqualified but "allowed" expenses of housing, utilities and food. This amount is tax exempt because it was used to pay these expenses "in direct support" of the education. "It's not tax free if it was used to pay these expenses for the three summer months the student was not enrolled as a full time student.)
That brings the total 3rd party income to $25,000. Now lets look at what the student paid with their own taxable income.
Housing/utilities for the three summer months (if they did not go home for the summer) comes to $4800
Food costs for those three months comes to $1000 (and that's if the student eats steak and lobster for lunch and dinner every day, 7 days a week.
Clothing - $500
Transportation - $1000 (gas for the car, and that's A LOT of driving in three months!)
Entertainment - $1000
That brings the total of all support expenses for the year to $31,800. The IRS will apply all 3rd party income to all expenses *first*. Now since the student has a total of $25K of scholarship/529 income when the student did NOT earn, that is without question, more than half of the student's support cost for the year that was not paid for by the student with money they earned. So in this scenario, even if the student earned a million dollars, there is no way they provided more than half of their own support.
So in the end, if your daughter did NOT provide more than half of her own support, she MUST select the option for "I can be claimed on someone else's return" She does not have a choice. You the parent do have the choice to claim her or not.
Finally, as far as I know at this point in time, your daughter will get the $12K standard deduction *no* *matter* *what*. So if there is no excess scholarship/grant money (which is taxed to the student at the higher parents tax rate) and if the total of all her taxable income will be less than $12K, then there really is no reason why you should not claim her, provided you actually qualify to do so.
