I have 2 adult children that are both full-time students and our annual income is around $400K. Should we claim our children as dependents on our tax returns?

[ronschaeff]

Our children are 22 & 20 years old, both worked part-time, but didn't make more than $6000 each for their summer job employments and will be filing their own returns for those jobs.  They have college expenses, but we (parents) paid these for them.

[CatinaT1]

Yes, you should claim both children as dependents and claim one of the education credits.

They both are qualifying children. Please see the requirements listed below.  

In order to be a qualifying child, the person must:    

• Be your son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them   
• Be under age 19 or under age 24 and a student at the end of the year OR permanently and totally disabled   
• Have lived with you for more than half of the year  (temporary absences at school do not count) 
• Not have provided more than half of his or her own support   
• Not be filing a joint return for the year   

[ronschaeff]

Hello CatinaT1, thank you for your reply. 

As a followup to my initial question, I am wondering if is there a benefit for our 2 adult children to claim themselves on their individual returns, versus us, claiming them as dependents on our return, especially since we have over $400K in income?  Thanks.

[CatinaT1]

No. If they made less than $6k for the year, there is no benefit to them claiming themselves. It is more advantageous for you to claim them.

[Opus 17]

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@ronschaeff wrote:

Hello CatinaT1, thank you for your reply. 

As a followup to my initial question, I am wondering if is there a benefit for our 2 adult children to claim themselves on their individual returns, versus us, claiming them as dependents on our return, especially since we have over $400K in income?  Thanks.

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There are certain situations where high income parents are not eligible for the American Opportunity Credit (because it phases out).  In such cases, the child might qualify for a credit, if the child has income earned from working.  The parents will lose a $500 tax credit by not claiming the child as a dependent.  If the child qualifies for more than $500 of AOTC, it may be advantageous for the parents to not claim the child(ren).

I believe that for the child to benefit from the AOTC, they need more than $13,000 of taxable income.  But @Hal_Al will be more up to date.

It's important to note that there is no "free money" from the AOTC for a student under age 24 whose parents are alive.  Any AOTC credit is limited to tax the child owes, and the child only owes tax if their income is more than $13,000.

If you go this route, the child must still answer "Yes, I can be claimed as a dependent by another taxpayer?" if they can be claimed.  There is a followup question, "Will the person who can claim you, actually claim you this year?" and the child would answer no.

Your children can test their tax returns to see if they get any credit, before filing.  But if their income is less than $6000, I don't think they get any credit, and the parents should still claim them. 

[Hal_Al]

As others have said, there is no advantage for the kids claiming themselves. You would lose the $500 other dependent credit. The credit begins to phase out for taxpayers with income of $200,000 or more ($400,000 for married filing jointly.

With the tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, you only qualify for an education credit or deduction, if you are not a dependent*. With $6000 of earned income, they are not even required to file a tax return, except to get any income tax withheld refunded. 

Your income is too high to qualify for a tuition credit. Their income is too low (less than $12,950 of earned income) to qualify*.

But, all that is academic.  It is not optional for them to claim themselves. If they can be claimed as your dependent, they must check that box on form 1040, whether you actually claim them or not. 

*If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)