I claim my son as a dependent. He has a taxable scholarship. Do I claim that income on my return or does he? He has other income and files a return.

[Bsch4477]

Pub 970 page 21 addresses this. The verbiage differs from mine but the effect is the same. I believe the intent is to prevent wealthy parents whose income limits the credit from getting the advantage of their student getting the refundable credit by not claiming the student. 

Refundable Part of Credit
Forty percent of the American opportunity credit is refund- able for most taxpayers. However, if you were under age 24 at the end of 2019 and the conditions listed below ap- ply to you, you can't claim any part of the American op- portunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only.
You don't qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.
1. You were:
a. Under age 18 at the end of 2019, or
b. Age 18 at the end of 2019 and your earned in- come (defined below) was less than one-half of your support (defined below), or
c. Over age 18 and under age 24 at the end of 2019 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).
2. At least one of your parents was alive at the end of 2019.
3. You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2019.

[Carl]

Thanks for clarifying that @Bsch4477 . I try to stress clarity on the support issue. If you'll take note, the support requirement is on the student, and only the student.  Even what you cited on page 21 makes no mention of parental support one way or the other.

I see a number of post from parents where they question if they can claim the student since they did not provide more than half of the student's support. So it has to be clarified that there is absolutely no requirement what-so-ever for the parent to provide a single penny of support to the student. The support requirement is on the student, and only the student.

While not impossible and not unheard of, it is rare for an undergraduate to provide more than half of their own support. Especially if they're not married and a full time student.

[zeblon]

Thanks Carl, that clears it up for me.

[Bsch4477]

Carl, I want to be sure we are reading this the same way. The rules read that the student cannot receive the refundable credit if the student  earned less than half of their support.  In other words (for practical purposes), the student was , in fact—by default—supported by the parent. So in practical terms, if the parent supported the student, the student is not eligible for the refundable portion. As you pointed out, that is the usual situation.  (As an aside, if the student did earn more than have of his support and did, in fact, support himself, he could no longer qualify as a dependent and would claim all of the credit himself anyway).

[Carl]

Carl, I want to be sure we are reading this the same way. The rules read that the student cannot receive the refundable credit if the student  earned less than half of their support.  In other words (for practical purposes), the student was , in fact—by default—supported by the parent.

In practical terms, there is no requirement the student be supported by the parents. The student can get their support by numerous methods not involving the parents for one penny. Other than the student's own earned income, there's scholarships, grants, 529 distributions, gifts from Aunt Mary, money they found out the ground, etc. All of that is considered third party support. Even money from the parent is considered third party support for the student. Lets look at the requirements for your typical undergrad, and I'll go into more details.

 - Must be enrolled in an accredited institution

 - Must be enrolled as a full time student for any one semester that starts in the tax year.

 - Must be pursuing a course of study that will lead to a degree or other credentialed certification

 - Must be under the age of 24 on Dec 31 of the tax year.

 - Must not have provided more than 50% of their own support.

 - Must be single, or if married *and eligible* must not file a joint return.

Now those are the requirements that in various places in IRS Pub 970 it's there in black and white.  For students that meet all of the above requirements, their parents are eligible to claim them as a dependent on the parent's tax return.  Note there is no requirement for the parent's to provide one single penny of suppot. The requirement just flat out does not exist.

There are only two possible ways a student can provide more than half of their own support.

 - The student is self-employed or as a W-2 job and actually is paid enough money in the tax year to justify their claim to paying more than half of their own support.

 - 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 them providing more than half of there own support.

That's it. There is no other possible way the student can provide more than half of their own support.

But did you also know that it's perfectly possible for a student to earn $300,000 in a tax year, and yet "still" not be able to claim or justify providing more than half of their own support?  To cover this aspect, we first need to define "support". Here's what the IRS considers support.

 - Qualified education expenses (tuition, books, lab fees)

 - Housing expenses (which includes utilities)

 - Transportation expenses

 - Clothing expenses

 - Food expenses

 - Entertainment expenses

That pretty much covers it for what the IRS considers expenses for "support". The IRS also states those expenses have to be "reasonable" too.  There's an IRS publication somewhere that I can't recall or find now that explains how the IRS determines what is reasonable. But let's assume a student actually earned $300,000 of income in a tax year. Here's how they will "NOT" qualify to claim they provided more than half of their own support.

 Student's suport cost in tax year:

- Housing (including utilities) - $15,600 ($1000/mo rent & $300/mo utilities)

- Food - $4800 ($400/mo which is on the high side really)

- Transportation - $6000 (assuming the student has a car, figure $500/mo for gas, which is on the high side)

- Clothing - $500 (I doubt a student would spend that much on clothing in a year)

- Entertainment - $3000 (that's $250/mo which is high)

- Qualified Education Expenses - $20,000 (that's tuition, books & lab fees which I've made "just barely" unrealistically high.)

So the total support expenses for the year comes to $49,900. So the student would need to have earned at least $24,951 to have any claim of providing more than half of their own support. But here's how that gets nixed.

3rd Party Support received by or on behalf of student:

 - Scholarships & grants - $20,000

 - 529 distributions - $16,000

That comes to $36,000 of third party support. So even if the student earned $300,000 during the year, if they claim they provided more than half of their own support, they better be ready to prove to the IRS that their *REASONABLE* support costs exceed $72,000 for that tax year. I can assure you that's not going to happen no matter where you attended college on this planet - much less in this country. 

The IRS also has restrictions on maximum amounts that can be claimed on some of those items too. Here's a few:

 - Housing (including utilities) If the student is living off campus, then what they claim for housing costs can not be more than what it would cost them to live on campus. The only exception is if the school does not provide on-campus housing, or if the student has a letter from the school informing the student that on-campus housing is not available and they have no choice but to pursue off campus housing. Even with the exception, the cost must be reasonable for the area they are living in. So claiming the cost for a $5000/month suite in Trump Towers is not going to cut it.

 - Food - There are very few colleges that don't offer a food plan for their students. If the school offers on campus cafeterias or what is referred to as a "food plan", then what they claim for food costs each semester can not exceed the cost of the food plan. The fact the student may be working their income producing job when the cafeteria is open does not matter. Exceptions are that if the student is living off campus *not* by their own choice, or if the school does not offer a food plan. But even then, costs must be reasonable. (So no steak and lobster for lunch and dinner every day.)  If the student claims it costs them $1000/mo to eat, that's just not gonna fly.

So as you can see, overall the student's earnings really don't matter at all when it comes to the support question. What the parent's pay for that student's support (if they pay anything at all) doesn't come into play here either.

[Carl]

Carl, I want to be sure we are reading this the same way. The rules read that the student cannot receive the refundable credit if the student  earned less than half of their support.  In other words (for practical purposes), the student was , in fact—by default—supported by the parent.

In practical terms, there is no requirement the student be supported by the parents. The student can get their support by numerous methods not involving the parents for one penny. Other than the student's own earned income, there's scholarships, grants, 529 distributions, gifts from Aunt Mary, money they found out the ground, etc. All of that is considered third party support. Even money from the parent is considered third party support for the student. Lets look at the requirements for your typical undergrad, and I'll go into more details.

 - Must be enrolled in an accredited institution

 - Must be enrolled as a full time student for any one semester that starts in the tax year.

 - Must be pursuing a course of study that will lead to a degree or other credentialed certification

 - Must be under the age of 24 on Dec 31 of the tax year.

 - Must not have provided more than 50% of their own support.

 - Must be single, or if married *and eligible* must not file a joint return.

Now those are the requirements that in various places in IRS Pub 970 it's there in black and white.  For students that meet all of the above requirements, their parents are eligible to claim them as a dependent on the parent's tax return.  Note there is no requirement for the parent's to provide one single penny of suppot. The requirement just flat out does not exist.

There are only two possible ways a student can provide more than half of their own support.

 - The student is self-employed or as a W-2 job and actually is paid enough money in the tax year to justify their claim to paying more than half of their own support.

 - 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 them providing more than half of there own support.

That's it. There is no other possible way the student can provide more than half of their own support.

But did you also know that it's perfectly possible for a student to earn $300,000 in a tax year, and yet "still" not be able to claim or justify providing more than half of their own support?  To cover this aspect, we first need to define "support". Here's what the IRS considers support.

 - Qualified education expenses (tuition, books, lab fees)

 - Housing expenses (which includes utilities)

 - Transportation expenses

 - Clothing expenses

 - Food expenses

 - Entertainment expenses

That pretty much covers it for what the IRS considers expenses for "support". The IRS also states those expenses have to be "reasonable" too.  There's an IRS publication somewhere that I can't recall or find now that explains how the IRS determines what is reasonable. But let's assume a student actually earned $300,000 of income in a tax year. Here's how they will "NOT" qualify to claim they provided more than half of their own support.

 Student's suport cost in tax year:

- Housing (including utilities) - $15,600 ($1000/mo rent & $300/mo utilities)

- Food - $4800 ($400/mo which is on the high side really)

- Transportation - $6000 (assuming the student has a car, figure $500/mo for gas, which is on the high side)

- Clothing - $500 (I doubt a student would spend that much on clothing in a year)

- Entertainment - $3000 (that's $250/mo which is high)

- Qualified Education Expenses - $20,000 (that's tuition, books & lab fees which I've made "just barely" unrealistically high.)

So the total support expenses for the year comes to $49,900. So the student would need to have earned at least $24,951 to have any claim of providing more than half of their own support. But here's how that gets nixed.

3rd Party Support received by or on behalf of student:

 - Scholarships & grants - $20,000

 - 529 distributions - $16,000

That comes to $36,000 of third party support. So even if the student earned $300,000 during the year, if they claim they provided more than half of their own support, they better be ready to prove to the IRS that their *REASONABLE* support costs exceed $72,000 for that tax year. I can assure you that's not going to happen no matter where you attended college on this planet - much less in this country. 

The IRS also has restrictions on maximum amounts that can be claimed on some of those items too. Here's a few:

 - Housing (including utilities) If the student is living off campus, then what they claim for housing costs can not be more than what it would cost them to live on campus. The only exception is if the school does not provide on-campus housing, or if the student has a letter from the school informing the student that on-campus housing is not available and they have no choice but to pursue off campus housing. Even with the exception, the cost must be reasonable for the area they are living in. So claiming the cost for a $5000/month suite in Trump Towers is not going to cut it.

 - Food - There are very few colleges that don't offer a food plan for their students. If the school offers on campus cafeterias or what is referred to as a "food plan", then what they claim for food costs each semester can not exceed the cost of the food plan. The fact the student may be working their income producing job when the cafeteria is open does not matter. Exceptions are that if the student is living off campus *not* by their own choice, or if the school does not offer a food plan. But even then, costs must be reasonable. (So no steak and lobster for lunch and dinner every day.)  If the student claims it costs them $1000/mo to eat, that's just not gonna fly.

So as you can see, overall the student's earnings really don't matter at all when it comes to the support question. What the parent's pay for that student's support (if they pay anything at all) doesn't come into play here either.

[cnewberry211]

My new tax guy is telling me if I claim my college student as a dependent on my return I also have to claim his excess scholarship money (over $11,000) as income on my return.  Is this correct?

I thought he would claim it as income on his return and pay the taxes but I could still claim him as a dependent?

Please help!

[Bsch4477]

You are correct. The scholarship income is his and if he has a filing requirement only he pays tax on that income.  Whether you claim him or not is irrelevant to the responsibility for the scholarship income. 

[cnewberry211]

Thank you for the information!

[videot7]

Carl, in our case, the tuition reported covered by scholarship was $2,869 and the total scholarships was $4,220.  If I wanted to do as this post suggests and report it on our son's taxes as non-qualified, can I just say that they were non-qualified and report it as income?  Or do I need to substantiate that somehow.  He lived at home and while we provided meals and a roof over his head, we did not charge room and board, per se.

I figured out how to enter it as non-qualified on his taxes, (answer "Yes" to the question about paying room and board with a scholarship and put $4,220 in), but how do I then take the credit on my taxes in TT?  I could answer yes to the same question on my taxes, but then it appears as if I have to say that the entire scholarship amount of 4,220 was for room and board.  The only other way I see to do that is to zero out the amount off of the scholarship amount on the 1098T.  Would either of these trigger a problem with the IRS?  Or do we need to connect the dots somehow?  Thanks for your help!  (Please note that I revised some amounts after looking at TT further.)

[Carl]

@videot7 your post is what is referred to as an "add on" to a thread that you did not start. So the absolute only fact I know about your specific and explicit information is that $2,869 of scholarship money received in 2019, was used to pay for qualified education expenses in that same tax year. That's it. I don't know if there's 529 funds involved, what the total tuition paid in 2019 was, or what the total amount of schoarship money awarded/received in 2019 was.

But the general rule is, if scholarships, grants and 529 distributions recevied in a tax year exceed the qualified education expenses paid in that same tax year, then it is the student, and only the student that will report it on their own tax return, and it is the student and only the student that will have the established tax liability to pay taxes on the excess. Now who actually pays it, the IRS doesn't care. But legally speaking, the tax liability is on the student. There's more too.

That excess money is taxed to the student at the "higher" parent's tax rate, since the student qualifies to be claimed as a dependent on the parent's tax return. It doesn't matter if the parent's actually claim the student or not either.

Now if there's 529 funds involved, there is a loophole I'm aware of, but don't have all the details on it to explain it myself. All I know for sure is that the loophole "requires" the student to have earned, taxable income.

I would suggest you start your own thread providing the details that are pertinent to your specific and explicit situation. Otherwise, reading through other threads that don't match your situation *exactly* will result in misleading information.

[videot7]

Hi Carl,

My original question was in reference to your reply about making all expenses non-qualified.  Then having my son pay the taxes on that, and I claim the credit.

Thanks for your prompt reply.  I realized two things after I posted.  1) that this was an appendage onto a reply that you made to someone else's reply.  And what I thought was a simple reply to something you said, ending up being something else entirely.

(2) I realized that I didn't include total scholarship or total tuition for the year.  I then revised that to include those numbers.  I had hoped to get that in before you replied, but boy, do you type fast!

Anyway, there is not a 529 involved here.   Just more scholarships than tuition because apparently the Spring 2019 semester tuition payment was placed in the 2018 1098T for some reason.

Now that I look at what I just wrote, I probably do need to start a new thread as there is more to this.  If you can make something of this, go for it.  Otherwise, I'll work on a new thread tomorrow, because, alas, it is late and obviously my brain is starting to go. 🙂

[Spielerman]

Where is the $6,100 amount coming from?

For 2019, isn't it now 12,200 for a dependent earned income not to need to file a tax return? And excess scholarships considered earned income?  What is the 2020 amount?

I am getting ready to send my son off to college and he has a full ride for all costs ( including room and board), he will be my dependent, and I am wondering how much earned income he can have before he owes taxes on 2020.

[Carl]

For 2019, isn't it now 12,200 for a dependent earned income not to need to file a tax return? And excess scholarships considered earned income? 

That is correct. For a student that "earned income" includes excess taxable scholarship income.  But you really need to consult IRS Publication 501 at https://www.irs.gov/pub/irs-pdf/p501.pdf and look at all three tables; Table 1, Table 2 and Table 3. They all matter because for a student that can be claimed as a dependent, their filing threshold is the "lower" of $12,200, or their earned income plus $350. So if a college student who qualifies to be claimed as a dpendent on their parent's return has $6000 of earned income, and $500 of excess scholarship money, they exceed the threshold by $150 and are required to file a tax return. Weather the parent actually claims them or not is irrelevant. The key word is tha they "QUALIFY" to be claimed as a dependent onthe parent's tax return.

What is the 2020 amount?

No clue.

I am getting ready to send my son off to college and he has a full ride for all costs ( including room and board), he will be my dependent, and I am wondering how much earned income he can have before he owes taxes on 2020.

I would expect $12,300 or his earned income plus $350 - whichever is lower.

For your benefit and to help you with planning tax-wise for his 5 calendar years of college towards a 4 year degree, I've attached three word documents that I hope you find informative, educational and helpful. I wrote these some time ago based on lessons learned when I put my first of two kids through college. I suggest you read the "it.docx" document first. Would be interested to know what you think after reading all of them. You'll be the first I've shared my lessons with.

[Carl]

For 2019, isn't it now 12,200 for a dependent earned income not to need to file a tax return? And excess scholarships considered earned income? 

That is correct. For a student that "earned income" includes excess taxable scholarship income.  But you really need to consult IRS Publication 501 at https://www.irs.gov/pub/irs-pdf/p501.pdf and look at all three tables; Table 1, Table 2 and Table 3. They all matter because for a student that can be claimed as a dependent, their filing threshold is the "lower" of $12,200, or their earned income plus $350. So if a college student who qualifies to be claimed as a dpendent on their parent's return has $6000 of earned income, and $500 of excess scholarship money, they exceed the threshold by $150 and are required to file a tax return. Weather the parent actually claims them or not is irrelevant. The key word is tha they "QUALIFY" to be claimed as a dependent onthe parent's tax return.

What is the 2020 amount?

No clue.

I am getting ready to send my son off to college and he has a full ride for all costs ( including room and board), he will be my dependent, and I am wondering how much earned income he can have before he owes taxes on 2020.

I would expect $12,300 or his earned income plus $350 - whichever is lower.

For your benefit and to help you with planning tax-wise for his 5 calendar years of college towards a 4 year degree, I've attached three word documents that I hope you find informative, educational and helpful. I wrote these some time ago based on lessons learned when I put my first of two kids through college. I suggest you read the "it.docx" document first. Would be interested to know what you think after reading all of them. You'll be the first I've shared my lessons with.

[Chung11358]

It this effected the scholarships/grants he received for school, if my child under 24 of age and he filed income tax independent.

[KrisD15]

If you are asking if this will affect his FASFA amount, we really can't say, that isn't a tax question. 

I ASSUME it would not if he earned less than his parents, but there is also the fact that if the student is a dependent, they need to file that way.