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.

[macuser_22]

You cannot apply the definitions in one section of the tax code to a different section, that is one thing that makes taxes confusing.   For example, the term MAGI (Modified Adjusted Gross Income) is used in about 6 different places in the tax code, each defined differently (your MAGI for health care is much different than for IRA deductions).

[woodlore]

Fair enough, and thanks for the clarification.  The part in pub 501 is pretty clear.  I will edit my answer below and remove the part about filing requirements.  My comments about who reports the income will remain, for now at least.

[gcarlos999]

Just to double check. My daughter(19) has scholarships that exceed the qualified education expenses, and has a 1098-T and is more than $6300. Can she file her own taxes (take Standard deduction)  and I can put her in my taxes as a dependent and I don't need to deal with any of her income ?

[woodlore]

I called the IRS with this question today for tax year 2015.  Their answer was that if the scholarship reported on 1098-T is taxable, it needs to be reported on the return of the individual to whom the 1098-T is addressed.  This is probably the student in most cases, as it always is for me.

Publication 970 for 2015, in two separate sections discussing coordination with Pell grants and other scholarships (pages 15 and 26), suggests "consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses."  Also this: "Thus, including enough scholarship or fellowship grant in the student's income to report up to $4,000 in qualified education expenses for your American opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income."  Similar language occurs in several parts of those sections.  So this seems to match the answer from the IRS.  These same sections also make it clear, by distinguishing between 'you/your' and 'the student', that it is possible for the parent to claim the credit even though the student reports the income.

Here, then, is how I handle my situation:
1) I claim my son as a dependent because he qualifies and I choose to do so.
2) He has a scholarship that is large enough to cover all tuition and other expenses that qualify for the education tax credits, but it is not large enough to cover anything else.  So this *can* be a tax-free scholarship.
3) As it stands, my Adjusted Qualified Education Expenses on form 8863 are $0 for him, because I had to "reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance", and I therefor receive no tax credit for him.
4) Even though the scholarship *can* be tax-free, I choose to report $4000 of it as taxable income on my son's taxes.  Publication 970 and the instructions for form 8863 both suggest this as an option to consider.  Note that some scholarships may explicitly require that the funds be used only for tuition, books, and fees.  If that is the case, this strategy is not an option.
5) I can now claim $4000 of qualified expenses on for 8863 for him, because I used $4000 of the scholarship for non-qualifying expenses (room and board), and my own $4000 for qualifying tuition expense.
6) I get $2500 education tax credits on my taxes.
7) My son now needs to pay taxes on the $4000 of scholarship income.  In our situation, he has no other income, so his tax liability is $0.  In fact, the $4000 of taxable scholarship income is not even enough to require him to file a return.

[joshambuehl]

Are the parents allowed to claim child as a dependent if they want the child to file their own return?

I read it as parents can either claim dependent and get the benefits/credits of that BUT have to include excess scholarship as taxable income

or

Parents DO NOT claim as dependent. Child has to select "can be claimed as dependent" on own return. And then file if necessary (earned income over the threshold)

Let me know!

[macuser_22]

---

@joshambuehl wrote:

Are the parents allowed to claim child as a dependent if they want the child to file their own return?

While nobody can be compelled to claim a dependent, a dependent cannot claim them self if they can be claimed by another tax payer - the tax law does not allow that.

That is why there are two questions in the interview - *can* you be claimed as a dependent by another taxpayer, and *were* you (or will you) actually be claimed by that taxpayer?

In both cases the dependent will not get the full deduction. if the answer is "no", the dependent is then allowed to claim certain educational credits that cannot be claimed by a dependent if they are actually claimed.

A dependent is required to check that they *can* be a dependent whether they are actually claimed or not.

[Carl]

@joshambuehl 

If the student is required to file a tax return, then the student is required to file a tax return. Period. End of that story.

If the parents *QUALIFY* to claim the student as a dependent on the parents' tax return, then it flat out *does* *not* *matter* if the parents actually claim that student or not. The student doesn't have a choice and *must* select the option for "I can be claimed on someone else's tax return".

Please take note that for the student, the option is "I ****CAN*** be claimed..." Not, "I **WILL** be claimed"

The parents have the choice to claim the student or not.  If the parents *QUALIFY* to claim the student, then the student does not have any choice on what the student is required to indicate on the student's tax return.

Here's some things that students and parents alike get confused on to, when trying to figure out the dependent stuff.

 - There is no requirement for the parents to provide the student any support. Not One Single Penny. The support requirement is on the student, and *ONLY* the student. It reads:

If the student did not provide more than 50% of the student's own support, then the parents qualify to claim the student as a dependent on the parent's tax return. Scholarships, grants, 529 funds, gifts, etc. do not count for the student providing their own support"

- Take note of the word *QUALIFY*. In no way does it insinuate an absolute requirement to claim the child.

- There is no requirement for the parents to provide a single penny of support to the student.

- The student's earnings/income does not matter. The student could earn a million dollars and yet the parents' still qualify to claim them.

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

1) The student had a job or was self-employed during the same tax year and earned sufficient monies to have provided more than half of their support.

2) The student was the ***PRIMARY*** borrower on a *qualified* student loan and sufficient funds were distributed to the student during the year to justify the student providing more than half of there support.

Now even with that, it's perfectly possible for the student to earn $500,000 in a tax year, yet still be unable to have provided more than half of their own support. So student earned/borrowed income alone won't do it.

If the student received $150,000 (my numbers are exaggerated to make the point here) in scholarships, grants, 529 distributions and other third party sources, that would mean the student would have to have more than $150,000 of income ithey earned in the tax year *AND* that it cost them more than $300,000 to support themselves for the tax year.

Now there is no way on this green earth that you will ever convince the IRS that it cost more than $300,000 to support an *undergraduate* student for a year, I don't care what college you go to including Yale, BYU, Harvard, etc. Support cost have to be "reasonable" and $300,000 which includes the tuition and other education cost is flat out *not* reasonable any way you look at it.

[debbiew007]

Hello @Carl , thank you for your indepth explanation. I do have some follow-up questions. You specifically state if the student is "enrolled in an undergraduate program"; do the same rules apply if it is a graduate program? 

I have reread your column at least five times and will read it again. But if you would clarify the following:

1) I have established I AM eligible to claim my student as a dependent based on all the rules. 

2) He will receive more than $6100 in taxable awards. 

I am unclear if it is an option who claims the excess amount.

Is this correct?

1) I CAN if I want the tax breaks

2) He CAN but would need to pay the tax on the amount and he gets the tax breaks?

OR since I am claiming him, I HAVE to include the taxable amount on my return?

Please feel free to redirect me to the IRS if I am making this far too complicated.

Thank you!

[ThomasM125]

The child would have to claim the scholarship income in excess of qualifying education expenses on his or her tax return. 

And as a practical matter, since their is excess scholarship income, the parent would not be allowed an education credit, so there would be no reason to enter the education information on the parent's return.

If the child is eligible to be claimed as a dependent of the parent, then the parent is the only one that can claim him, the child must indicate in TurboTax that he is a dependent of someone else.

[Carl]

do the same rules apply if it is a graduate program?

No. That's why the program asks you if the dependent as completed 4 years of college as of Jan 1 of the tax year. If you answer the question yes, then different rules apply and the program knows what those rules are.

I am unclear if it is an option who claims the excess amount.

In a situation where scholarships and grants exceed the qualified education expenses, then it's the student who will report all of the education stuff on the student's return, and the student will pay taxes on excess that was not used for qualified education expenses. it does not change the fact that parents will still claim the student as their dependent, if they qualify to claim the student as their dependent. It does not change the fact that the student must select the option for "I can be claimed on someone else's tax return" if the parents qualify to claim the student - even if the parents do not claim the student.

Please feel free to redirect me to the IRS if I am making this far too complicated.

No, you're not making things complicated at all. The IRS does that very well all on their own. Just go back and read my very first response in this thread. I clearly reference IRS Publication 970 and then I do my best to put that document into plain english, so that all of us mere mortals can comprehend it. 🙂

You want complicated? Just read IRS Publication 970. Then take two cyanide tablets and call me in the morning. 🙂

[zeblon]

Carl, there's a scenario you answer doesn't address. I'm hoping you can clarify.

Pub 970 says you can count any portion of a scholarship as regular income, not just the amount in excess of tuition:

"You may be able to increase your American opportunity credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student's gross income...consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses."

For example, my daughter's 1090-T shows $9,000 in tuition and $18,000 in scholarships (yep, it's a nice scholarship).  Pub 970 says she can choose to split that $18,000 as $5,000 covering qualified educational expenses, and $13,000 as taxable income used to pay non-qualifying expenses.  That would leave an additional $4,000 in tuition that was not covered by the tax-free portion of the scholarship, which qualifies toward claiming the $2,500 American opportunity credit.

So here's the question: can the student still choose to split the scholarship between qualified and non-qualified expenses as described above, even if she will be claimed by me?  And does this allow ME to claim the $2,500 credit?

[Carl]

can the student still choose to split the scholarship between qualified and non-qualified expenses as described above, even if she will be claimed by me? 

Yes. But the student (not you) will pay income tax on the entire $13K not used for qualified expenses.

And does this allow ME to claim the $2,500 credit?

Yes, provided you have the tax liability to claim it against. Remember, a "CREDIT" is a dollar for dollar reduction of your tax liaibility. Whereas a "DEDUCTION" is a reduction in the amount of income you are taxed on.

So if before you take the credit your tax liability is for example, $1500, then the maximum credit you can get is $1400.

Now there's two portions to the AOTC credit. The refundable part, and the non-refundable part. I quite honestly don't recall the difference and how it all works. But I think @Anonymous_ does, or can flag another who does know.

 I knew all the fine details on that when my own kids were in college. But it's been so long now that I forget that "fine detail".

[Anonymous_]

If I recall, @Bsch4477 and @macuser_22 have answered a lot of questions related to education expenses.

@Carl 

[Bsch4477]

1.  If the parent claims the student only the parent can claim the education credit.  The parent can choose what amount of the scholarship was used for tuition and books and what part was used for non qualifying  expenses. The non qualifying amount flows to line 1 of the 1040 as income.  That income is earned income for the student to decide if the student has a filing requirement but if the student has a filing requirement that income magically becomes unearned income for consideration of the kiddie tax. (Strange, I know).  The parent, if otherwise qualified by income level, is eligible to receive the refundable portion of the credit. 

2.  If the student is not claimed as a dependent, the student can now claim the education credit and is free to manipulate the scholarship amount between qualified and non qualifying expenses as above. BUT the student cannot receive the refundable portion of the credit if the student has a living parent supporting that student. 

[Carl]

the student cannot receive the refundable portion of the credit if the student has a living parent supporting that student.

Can you clarify that a bit more for me please? I've read through pub 970 several times over the years and no where have I ever found "any" requirement for the parent to provide the student one single penny of support, for any deduction or credit if they qualify as the parent's dependent. (undergrad, under age 24, full time, etc... the standard stuff)