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eph3
New Member

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

I am working overseas and qualify for the Foreign Earned Income Exclusion. I don't see any benefit to me to continue to claim my son as a dependent. Is it ok for me to let him be independent? Advantages/disadvantages? If I move back to the U.S. in a couple years, can I start claiming him as dependent again?

11 Replies
SweetieJean
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

You do not get to choose. The IRS rules must be followed.
Critter
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

If your child qualifies as your dependent then they still cannot claim themselves even if you don't claim them on your return ... per the IRS rules.
eph3
New Member

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

Ok, I dug around some more and think I understand what you two are saying (SweetieJean and Critter#2). He'll have to check on his taxes that he "can" be claimed as a dependent, even if I am not actually claiming him. So then he can't take the personal exemption anyway. Is that what you mean?

Found this in Publication 17, Ch 3, Personal Exemptions and Dependents
"Dependent not allowed a personal exemption. If you can claim an exemption for your dependent, the dependent can’t claim his or her own personal exemption on his or her own tax return. This is true even if you don’t claim the dependent's exemption on your return. "

The reason I am digging here is because I need to know what to include in his "Household Income" for the purposes of applying for medical insurance (my international plan won't cover him). Healthcare.gov told me that if I claim him as a dependent, and he applies for insurance, he'll have to include my income. So the above excerpt from Pub 17, Ch 3 does not say that I must claim him as a dependent, only that if he can be claimed, he can't take a personal exemption (even if I don't claim him). Right? Or am I missing something?
Critter
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

From what you are describing he no longer is a dependent of yours  if he pays for more than 1/2 of his living expenses.

See page 12 ...   <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p501.pdf">https://www.irs.gov/pub/irs-pdf/p501.pdf</a>
Critter
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

And the support worksheet on page 16.
SweetieJean
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

"My son just entered college" So he's like 18 yrs old?
eph3
New Member

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

Yes, 18, will be 19 in March 2018.
Critter
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

So the above excerpt from Pub 17, Ch 3 does not say that I must claim him as a dependent, only that if he can be claimed, he can't take a personal exemption (even if I don't claim him). Right?  

Correct.
SweetieJean
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

But you may as well claim him, as you may get some refundable education credits.
Critter
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

Yes, the dependent cannot get the refundable portion of the education credits ... you really need to review both returns before you file either of them to see what is the best overall outcome.
Carl
Level 15

I qualify for a Foreign Earned Income Exclusion. My son just entered college, should I still claim him as a dependent? Or is it better for him to be independent?

Here's the whole gist, translated to plain English from IRS Pub 970. The fact that there may be a foreign income exclusion is irrelevant for the below. The foreign income exclusion if it applies to you or the student, is a totally separate issue that stands on it's own.

College Education Expenses

Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:

 - Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*

- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.

Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”.  The first one indicates a choice. The second one provides no choice.

If the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a half time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

Then:

The parents will claim the student as a dependent on the parent's tax return and:

The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:

The parents will claim all educational tax credits that qualify.

If the student will be filing a tax return and:

The parents qualify to claim the student as a dependent, then:

The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.

Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.)  Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.

In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.

 If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6200, then the student doesn’t even need to file a tax return, and nothing has to be reported.

If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.

Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6200, then the student should file a tax return so as to get those withheld taxes refunded.

 

1099-Q Funds

 First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred as follows depending on what type of 1040 you’re riling.

1040-EZ excess scholarship income is included on line 1.
1040-A excess scholarship is included on line 7.
1040 Excess scholarhip is included on line 7.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is transferred as indicated above with one exception. For the 1040 excess ESA/QTP funds get transferred to line 21 with the annotation “SCH” next to it.

Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.


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