My daughter received a K-1 for an inheritance, and I claim her as a dependent on my return. She is in college and does have some employment income. How can I file this?

[chuckasa]

Does she need to file separately? or can I still claim her on my tax return?

[Hal_Al · Accepted solution]

You do not report his/her income on your return*. If it has to be reported at all, it goes on his own return. If your dependent child is under age 19 (or under 24 if a full time student), he or she must file a tax return for 2015 or 2016 if he had any of the following:

1.         Total income (wages, salaries, taxable scholarship etc.) of more than $6,300 (2015).

2.         Unearned income (interest, dividends, capital gains) of more than $1050 (2015). The K-1 income is unearned income.

3.         Unearned income over $350 and gross income of more than $1050

4.         Household employee income (e.g. baby sitting, lawn mowing) over $1900 ($6300 if under age 18)

5.         Other self employment income over $400, including box 7 of a 1099-MISC

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

 He doesn’t get his own $4050 exemption (deduction), when he files. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.

*If his only income is from interest and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV, there is a provision for entering it on your return, using form 8814. But, since you say she has some employment income, all her income goes on her own return.

[Texas Roger]

Your daughter would file her own tax return and enter her income. The inheritance is not taxable unless it is in a tax deferred account of some type. Any income received on the inheritance such as interest after she receives it would be taxable. 

There are two types of dependents--qualifying child and qualifying relative. You may be able to claim your daughter as a qualifying child dependent if she meets the following tests:

1. The child must be your son, daughter, stepchild, foster chld, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.

2. The child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student, or (c) any age and permanently and totally disabled.

3. The child must have lived with you for more than half of the year. Temporary absences while away at college are considered living with you.

4. The child must not have provided more than half of his or her own support for the year.

5. If the child meets the rules to be a qualifying child of more than one person, you must be the person entitled to claim the child as a qualifying child. 

6. The child must be a U.S. citizen or U.S., Canada or Mexico resident for some portion of the year.

7. The child must be younger than you (or your spouse, if filing jointly) unless disabled.

If she does not meet the tests to be a qualifying child, you may be able to claim her as a qualifying relative:

1. The person cannot be your qualifying child or the qualifying child of any other taxpayer. A child is not the qualifying child of any other taxpayer if the child's parent (or any other person for whom the child is defined as a qualifying child) is not required to file an income tax return or files an income tax return only to get a refund on income tax withheld.

2. The person either (a) must be related to you or (b) must live with you all year as a member of your household. 

3. The person's gross  taxable income for the year must be less than $4,050 in 2016.

4. You must provide more than half of the person's total support for the year.

5. The person must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico.

If you can claim her as either type of dependent, she must indicate on her tax return that she can be claimed by someone else.

[re2boys]

As long as she meets the requirements to be claimed as a dependent as outlined in other answers, you can claim her as a dependent.  It doesn't matter how much assets she has, but it does matter if she used those assets to provide for her own support.  If she provided more than 50% of her own support (including college costs) then you can't claim her. 

The K-1 represents the INCOME earned by the estate/trust that is passed on to the beneficiary and reportable on her own tax return.  While convenient and allowed under certain circumstances,  it is seldom to your advantage to ever report a child's income on a parent's tax return.  In the CPA office I work in,  we NEVER report a child's income on a parent return as it effects the parent's AGI and therefore can result in phase out of other tax benefits/credits.  Just be careful that if you claim her on your tax return, that she marks on her return that she is being claimed by someone else.

[SweetieJean]

But see:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/taxtopics/tc553.html">https://www.irs.gov/taxtopics/tc553.html</a>