Income for dependent

[TAM2024]

Granddaughter is college student with a part time job. Also inherited an IRA worth about $50,000.

How much money can she take from the IRA and how much income can she make in 2024 and still be claimed on her parents' income tax?

thanks

[Opus 17]

The question is, "does the child pay more than half her own support."  If she does not, then she can be claimed as a dependent.  You have to determine this for yourself based on your specific situation.

Her total support needs include tuition, room and board, medical care, travel, clothes, and entertainment.  

Support she provides herself includes wages, student loans in her name (even if they are not in repayment, because they are a promise to pay) and money taken from investments to pay for living costs.  Money that she spends on costs that are not her own support (such as, if she pays to support a child or boyfriend, or she invests the money) don't count as support she provides herself.  

Support provided by others includes a pro-rated share of household expenses at her permanent address, plus whatever other people pay to help support her (tuition, medical, etc.). For example, if your granddaughter lives with you "full time" (even if she is temporarily away at college), and there are 3 people total in the house, her support that you provide includes 1/3 the total cost of maintaining your home (rent or mortgage, utilities, insurance, repairs and maintenance).

Scholarships are ignored in this equation, they don't count on either side of the ledger. 

Note however, that if the child does not live in your home more than half the year, the rule is different.  She can't be claimed if she has more than $4700 of taxable income for 2023, or $5050 for 2024.  Children are usually considered to "live at home" while at college because college is considered a temporary absence.  But some children may actually permanently move out and establish independent homes for themselves.  So whether she is considered to live at home or live independently, determines which support and income test you use.

[rjs]

Note that income is not the same as support. In the first case that Opus 17 outlined (she lives with her parents more than half the year, including time away at college), her income doesn't matter. What matters is the amount of her own support that she provides, not how much income she makes. If she takes the money from her job and puts it in the bank, or invests it, that is not money spent for support. She can make as much as she wants, and take as much as she wants out of the IRA, as long as she doesn't use it for more than half of her own support.

[TAM2024]

Well, she lives on a college campus. Her parents are supplying all of her support. So you are saying that she can make as much income as  she can and take money from her inherited IRA (no limit.). ??  Correct?

thanks so much !!

[VolvoGirl]

And she might have a requirement to take withdrawals from the IRA of a certain amount or more.  And to take it all out by 10 years.   I’m not clear on how that works.  Someone else will have to answer.

[rjs]

Yes, she can make as much as she wants, as long as she doesn't use the money for her own support. What matters is how much of her own support she pays for, not how much money she makes. Support includes clothing, entertainment, meals, transportation, etc. It's not just rent and tuition. What is she going to do with all the money that she earns or takes out of her inherited IRA?

No matter how much income she has, it probably won't come anywhere near tuition and the cost of a dorm. But you haven't given any amounts. If she's at a low-cost state school and she has expensive tastes her income could end up being more than half of her total support.

[Opus 17]

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@TAM2024 wrote:

Well, she lives on a college campus. Her parents are supplying all of her support. So you are saying that she can make as much income as  she can and take money from her inherited IRA (no limit.). ??  Correct?

thanks so much !!

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Well, there will be income tax, of course.  And this income will likely be taxed at a higher rate than usual due to the "kiddie tax" as long as she is a full time student under age 24.

https://www.irs.gov/taxtopics/tc553

The issue for her tax return is how to answer "Can I be claimed by someone else as a dependent?"

She can be claimed if she 

a. lives "at home" for more than half the year.  We already discussed how most, but not all, college students are considered to live "at home" for this test.

b. Provides less than half her own support.  So now I would ask, if she withdraws money from the IRA, what is she using it for that is not her own support?  Support includes tuition, room and board, medical care, clothing, entertainment, travel, and so on.  If she buys a car, that is supporting herself.  If she buys fancy clothes or takes a world cruise, that is support.

To give an exaggerated example.  Suppose her tuition, room, board, travel and entertainment is $60,000.  Because she lives "at home", you can count a 1/3 share of your household expenses as support for her, let's say that's another $10,000.   So her costs are $70,000 per year.  As long as she pays $34,999 or less, she does not provide more than half her own support.  Suppose she withdraws $90,000 and buys a brand new Lucid EV.  That makes her support cost for the year $160,000, and she did pay more than half ($90,000) so she can't be claimed as a dependent.  Suppose instead she withdraws $90,000 and buys a Lucid for her romantic partner.  That's not support for herself, so her support costs are still $70,000 and as long as she pays less than $34,999, she can still be a dependent, even though she dropped $90K on a car for someone else.  (I frankly would cut off a child who was that irresponsible, but that's a different problem.)  The support test is based on who pays for support (living expenses) and does not consider spending on other people's living expenses.  

See publication 501 for all the rules.