Dependent status of college student

[rerrabolu]

Can Parents claim their children as dependent if the following conditions apply:

• Child is less than 24 years old
• Child is in college as a full-time student
• 90% of the expenses (tuition, room & board) were paid with distributions from Coverdell ESA
  • Distributions were lower than Cost-Of-Attendance
  • All of the contributions to Coverdell ESA were made by the parents, with the child as the beneficiary

I would like to know how IRS treats distributions from Coverdell. Are they treated as student owned?

• If so it implies student  has contributed more than 50% of the support for the year
• If not it implies parents can claim to have contributed more than 50% of the support for the year

Please advise how to interpret.

Regards,

Ramesh

[Bsch4477]

The account is considered an asset of the account custodian, typically the parent.So, yes, the student is a dependent. 

[MaryK4 · Accepted solution]

Unless the child made the contributions to the ESA, the funds cannot be considered as provided by the child for support.  Their status of beneficiary does not factor.  Because the person is under 24 and a full-time student, the person must have provided more than 50% of their own support (and a person’s own funds are not support unless they are actually spent for support.) in order to disqualify someone else claiming them as a dependent.  

[Carl]

 Understand that all income from third parties (scholarships, gransts, 529 distributions, gifts from Aunt Mary, money from aprents, etc) do not count for the student providing their own support. There are only two possible ways the student can provide more than 50% of their own support.

 - The student has a W-2 job or is self-employed and made a sufficient amount of income to justify a claim to providing more than half of their own support. Additionally, that earned income has to be more than the total amount of income received from all third party sources for the tax year.

 - The student is the primary borrower on a qualified student loan, and sufficient funds were distributed to the student during the tax year to justify a claim of providing more than half of their own support. Additionally, the amount of money distributed has to be more than the total of all third party income received for the tax year.

Two things to note: 

1) There is no requirement for the parents to provide the student any support. Not one single penny. The support requirement is on the student, and only the student.

2) There is no limit to how much money the student can earn (under the qualifying child rules). The student could earn a million dollars and still qualify as your dependent.

3) The key word in the rules is "QUALIFY". There is no requirement for the parents to claim the student as a dependent. However, if the parents qualify to claim the student, the student must select the option for "I can be claimed on someone else's tax return", even if the parents do not claim the student as a dependent. Basically, the parents have a choice. The student does not have a choice.

[rerrabolu]

Thanks MaryK4 for taking time share your expertise. 

I understand / follow the first two sentences. The comments after that are a bit confusing. Including below the same for reference.

Because the person is under 24 and a full-time student, the person must have provided more than 50% of their own support (and a person’s own funds are not support unless they are actually spent for support.) in order to disqualify someone else claiming them as a dependent. 

I think you are saying the following for the case under consideration. Could you please confirm.

• The student has not provided more than 50% of their own support
  • Funds used for support came from ESA distributions
• Since they have not provided more than 50% of their own support they cannot disqualify their parent in claiming them as a dependent

Regards,

Ramesh

[MaryK4 · Accepted solution]

Yes, the student must provide (and actually pay, not just have the funds) more than half of their support.  Since the student did not make the original contributions to the ESA, this would not be considered as paid by the student just because she is the beneficiary.  If the parents provided the original funding, they could count the ESA as support they provided ( but as I said the IRS will only be looking at how much the student has paid for essential living expenses).  

You could use the IRS Worksheet 2  to establish this.  When you said the parents would not be disqualified you are correct- looking the worksheet, if support is provided by the parents and even other people- as long as the student did not provide more than 50% of their own support, they parents will be able to claim them.  @rerrabolu