When would it be better for the parent to NOT claim their college student as a dependent?

[clk]

I'm trying to understand when it would be beneficial for the parent to be able to claim their child as a dependent and then not do so. It sounds like the parent can claim the dependent if the child doesn't provide more than 50% of their support from earned income plus loans. My son is right around the 50% line.

My son only spent about 3 weeks at my house last year. He lived off-campus at college for 5 months, in another state on an internship for 3 months and then in Europe on study abroad for the last 4 months of the year. His income from work and student loans was $20k. He got another $19k in scholarships. The only thing I paid for were some clothes and occasional groceries (plus covering his health insurance, at no additional cost to me). 

I think we would say that I cannot claim him as a dependent and he would answer that he is not a dependent and no one can claim him as one, but answers to other questions on this forum are making me question that. 

[DanielV01 · Accepted solution]

You are correct in your reasoning.  While scholarships are not considered him providing his own support (unless he claims some as taxable income, which he may do), loans are considered his own support because he is responsible to repay them.  But the question is not whether you provide 50% of his support, but rather if he provided at least half of his own support.  He is not providing his health insurance; that factors into the equation.  

If the numbers are close, he could claim a portion of his scholarship as taxable.  This then becomes his income that does contribute to his own support.  Then, you state as you mention in your question:  he states no one can claim him as a dependent, and he will be allowed to claim the refundable portion of the American Opportunity Credit on his tax return.

[Houston33]

What about: "Your earned income was less than half of your support in 2019... Yes/No"?

This is after establishing the parent can't claim you as a dependent so the parent isn't providing more than half of support, but it still seems that to qualify for the education credits, you also have to have earned income that that is 50% or more of your support. 

Lets say total support is $50K.  Parents are alive but supplying less than $25K so their high income is no longer a hinderance (they can't claim you), but you still need to earn at least $25K to qualify for education tax credits.  529 Withdrawals, loans, and investment returns do not count as earned income.  Am I understanding this correct?

[CatinaT1]

How have you decided that your parent can't claim you?  Are you under age 24?  As long as you are under age 24 at the end of the tax year, and were a full time student for at least 5 months out of the year, there is no income restriction on if your parents can claim you or not.

I think you are referring to the American Opportunity Credit.  This might help - 

Line 7

If you were under age 24 at the end of 2019 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, you can claim your allowed credit, figured in Part II, only as a nonrefundable credit to reduce your tax.

You don't qualify for a refundable American opportunity credit if 1 (a, b, or c), 2, and 3 below apply to you.

1.

You were:

a.

Under age 18 at the end of 2019, or

b.

Age 18 at the end of 2019 and your earned income (defined later) was less than one-half of your support (defined later), or

c.

Over age 18 and under age 24 at the end of 2019 and a full-time student (defined later) and your earned income (defined later) was less than one-half of your support (defined later).

2.

At least one of your parents was alive at the end of 2019.

3.

You're not filing a joint return for 2019.

If you meet these conditions, check the box next to line 7, skip line 8, and enter the amount from line 7 on line 9. If these conditions don't apply to you, complete line 8.

You can answer the following questions to determine whether you qualify for a refundable American opportunity credit.

1. Were you under age 24 at the end of 2019?

If no, stop here; you do qualify to claim part of the allowable American opportunity credit as a refundable credit.

If yes, go to question 2.

1. Were you over age 18 at the end of 2019?

If yes, go to question 3.

If no, go to question 4.

1. Were you a full-time student (defined later) for 2019?

If no, stop here; you do qualify to claim part of your allowable American opportunity credit as a refundable credit.

If yes, go to question 5.

1. Were you age 18 at the end of 2019?

If yes, go to question 5.

If no, go to question 6.

1. Was your earned income (defined later) less

than one-half of your support (defined later) for 2019?

If no, stop here; you do qualify to claim part of your allowable American opportunity credit as a refundable credit.

If yes, go to question 6.

1. Were either of your parents alive at the end of 2019?

If no, stop here; you do qualify to claim part of your allowable American opportunity credit as a refundable credit.

If yes, go to question 7.

1. Are you filing a joint return for 2019?

If no, you don't qualify to claim part of your allowable American opportunity credit as a refundable credit.

If yes, you do qualify to claim part of your allowable American opportunity credit as a refundable credit.

The educational institution's EIN must be provided on line 22(4) if the American opportunity credit is claimed for this student.

Earned income.

Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Earned income includes the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship grant. Earned income doesn't include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.

If you're a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). However, if capital isn't an income-producing factor and your personal services produced the business income, the 30% limit doesn't apply.

Support.

Support includes food, shelter, clothing, medical and dental care, education, and the like. Generally, the amount of an item of support will be the amount of expenses paid by the one furnishing such item. If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. To figure your support, count support provided by you, your parents, and others.

[Carl]

I'm trying to understand when it would be beneficial for the parent to be able to claim their child as a dependent and then not do so. It sounds like the parent can claim the dependent if the child doesn't provide more than 50% of their support from earned income plus loans. My son is right around the 50% line.

So lets break your post down.

My son only spent about 3 weeks at my house last year. He lived off-campus at college for 5 months, in another state on an internship for 3 months and then in Europe on study abroad for the last 4 months of the year.

Irrelevant really. Per IRS Publication 970, page 27, third column (https://www.irs.gov/pub/irs-pdf/p17.pdf)

Your child is considered to have lived with you during periods of time when one of you, or both, are temporarily absent due to special circumstances such as:

•Illness,

•Education,

•Business,

•Vacation

,•Military service, or

•Detention in a juvenile facility

Therefore the student is considered to have lived with you the entire year - evern single day.

His income from work and student loans was $20k.

Just to clarify for others reading this, there is no limit on the student's income. The student could earn a million dollars (literally!) and still qualify as a dependent.

He got another $19k in scholarships.

Things like scholarships are considered 3rd party support, and do not count for the student having supported themselves.

The only thing I paid for were some clothes and occasional groceries (plus covering his health insurance, at no additional cost to me). 

There is no requirement anywhere in IRS Publication 17 or IRS Publication 970 that requires the parent to provide the student any support. Not one single penny. Any monies you the parent provided to the student is considered 3rd party support.

I think we would say that I cannot claim him as a dependent

Well, it depends. There are only two possible ways a student can provide more than half of their own support. But first, you have to clarify just what counts as support. Support includes:

- Education costs (tuition, books, and lab fees.)

- Housing costs (rent plus utilities)

- Transportation costs

- Clothing costs

- Entertainment costs

I can tell you right now that if the total of all third party support from all sources (including the parents) exceeds the student's earned income for the year, then while not impossible, it is highly unlikely the student could support any claim to having provided more than half of their own support for the entire tax year. Two ways the student can provide more than half of their own support are:

1) The student was self-employed or had a W-2 job and the taxable income earned was sufficient to justify a claim to providing more than half of their own support. The taxable earned income would also need to be more than the total of all third party support received during the tax year.

2) The student is the *PRIMARY* borrower on a qualified student loan and sufficient funds were distributed to the student during the tax year to justify the student's claim to providing more than half of their own support. The funds distributed would also need to exceed the total of all third party support received by the student during that same tax year.

A combination of 1) and 2) would make it possible too. But it's also possible for the student to have earned a million dollars, and still not be able to justify a claim to having provided more than half of their support. The main thing for this is that costs must be "realistic".

For example, if the student received $80K in scholarships, grants, 529 distrubtions and other 3rd party sources, that would mean the student would need "at least" one dollar more than $80 of eather earned income or borrowed funds to have any claim to providing more than half of their support. But this is were those "realistic costs" come into play. You would have to be able to justify (and prove if audited) that it costs the student more than $160K to support them for the entire tax year. For an undergraduate, that's not anywhere close to realistic.

In other words, a $5000 a month penthouse suite for an undergraduate isn't going to cut it with the IRS. Likewise, neither will steak and eggs for breakfast and steak and lobster for lunch and dinner everyday, either. That $60,000 BMW the student pruchased for transportation? Definitely not realistic for an undergraduate.

and he would answer that he is not a dependent and no one can claim him as one, but answers to other questions on this forum are making me question that. 

That is not what the question is asking on your student's return. The question is asking if anyone else *QUALIFIES* to claim him as a dependent. Weather you actually claim him or not does not matter.

In other words, you the parent may have a choice weather to claim the student as your dependent, or not. But the student does not have a choice. If you the parent "qualify" to claim the student as your dependent, then the student has no choice and *must* select the option for "I can be claimed on someone else's tax return". Again, the student has no choice. The parent "does" have a choice.

So for your son with $20K of a combination of earned income and borrowed funds on a loan where your son is the primary borrower, the reason I doubt that's enough for him to provide more than half of his own support is because of the fact he attended school in a foreign country. While It's possible, with only $20K of self-support income for your son, I would think that more than $40K was spent during the tax year for his support needs as identified above. Therefore he would qualify as your dependent.

[Carl]

I'm trying to understand when it would be beneficial for the parent to be able to claim their child as a dependent and then not do so. It sounds like the parent can claim the dependent if the child doesn't provide more than 50% of their support from earned income plus loans. My son is right around the 50% line.

So lets break your post down.

My son only spent about 3 weeks at my house last year. He lived off-campus at college for 5 months, in another state on an internship for 3 months and then in Europe on study abroad for the last 4 months of the year.

Irrelevant really. Per IRS Publication 970, page 27, third column (https://www.irs.gov/pub/irs-pdf/p17.pdf)

Your child is considered to have lived with you during periods of time when one of you, or both, are temporarily absent due to special circumstances such as:

•Illness,

•Education,

•Business,

•Vacation

,•Military service, or

•Detention in a juvenile facility

Therefore the student is considered to have lived with you the entire year - evern single day.

His income from work and student loans was $20k.

Just to clarify for others reading this, there is no limit on the student's income. The student could earn a million dollars (literally!) and still qualify as a dependent.

He got another $19k in scholarships.

Things like scholarships are considered 3rd party support, and do not count for the student having supported themselves.

The only thing I paid for were some clothes and occasional groceries (plus covering his health insurance, at no additional cost to me). 

There is no requirement anywhere in IRS Publication 17 or IRS Publication 970 that requires the parent to provide the student any support. Not one single penny. Any monies you the parent provided to the student is considered 3rd party support.

I think we would say that I cannot claim him as a dependent

Well, it depends. There are only two possible ways a student can provide more than half of their own support. But first, you have to clarify just what counts as support. Support includes:

- Education costs (tuition, books, and lab fees.)

- Housing costs (rent plus utilities)

- Transportation costs

- Clothing costs

- Entertainment costs

I can tell you right now that if the total of all third party support from all sources (including the parents) exceeds the student's earned income for the year, then while not impossible, it is highly unlikely the student could support any claim to having provided more than half of their own support for the entire tax year. Two ways the student can provide more than half of their own support are:

1) The student was self-employed or had a W-2 job and the taxable income earned was sufficient to justify a claim to providing more than half of their own support. The taxable earned income would also need to be more than the total of all third party support received during the tax year.

2) The student is the *PRIMARY* borrower on a qualified student loan and sufficient funds were distributed to the student during the tax year to justify the student's claim to providing more than half of their own support. The funds distributed would also need to exceed the total of all third party support received by the student during that same tax year.

A combination of 1) and 2) would make it possible too. But it's also possible for the student to have earned a million dollars, and still not be able to justify a claim to having provided more than half of their support. The main thing for this is that costs must be "realistic".

For example, if the student received $80K in scholarships, grants, 529 distrubtions and other 3rd party sources, that would mean the student would need "at least" one dollar more than $80 of eather earned income or borrowed funds to have any claim to providing more than half of their support. But this is were those "realistic costs" come into play. You would have to be able to justify (and prove if audited) that it costs the student more than $160K to support them for the entire tax year. For an undergraduate, that's not anywhere close to realistic.

In other words, a $5000 a month penthouse suite for an undergraduate isn't going to cut it with the IRS. Likewise, neither will steak and eggs for breakfast and steak and lobster for lunch and dinner everyday, either. That $60,000 BMW the student pruchased for transportation? Definitely not realistic for an undergraduate.

and he would answer that he is not a dependent and no one can claim him as one, but answers to other questions on this forum are making me question that. 

That is not what the question is asking on your student's return. The question is asking if anyone else *QUALIFIES* to claim him as a dependent. Weather you actually claim him or not does not matter.

In other words, you the parent may have a choice weather to claim the student as your dependent, or not. But the student does not have a choice. If you the parent "qualify" to claim the student as your dependent, then the student has no choice and *must* select the option for "I can be claimed on someone else's tax return". Again, the student has no choice. The parent "does" have a choice.

So for your son with $20K of a combination of earned income and borrowed funds on a loan where your son is the primary borrower, the reason I doubt that's enough for him to provide more than half of his own support is because of the fact he attended school in a foreign country. While It's possible, with only $20K of self-support income for your son, I would think that more than $40K was spent during the tax year for his support needs as identified above. Therefore he would qualify as your dependent.

[Hal_Al]

@Houston33 

Yes, you understand it correctly, but not exactly. Even though the student doesn't qualify as a dependent because he provides more than half his own support; he will not qualify for the REFUNDABLE portion (up to $1000) of the American Opportunity Credit (AOC) because not enough of that support was from earned income. This rule is only applicable to unmarried, full time students under age 24. He still qualifies for the other credits, simply because you cannot claim him, But that will do him no good, if he doesn't have enough income to have a tax liability.

Your example is correct: If total support is $50K, the student needs to have more than$25,000 of earned income to claim the refundable portion of the AOC.

Side issue: a distribution from a 529 plan is not necessarily support provided by the student, if he is the beneficiary and the parent is the owner. See:

https://ttlc.intuit.com/community/taxes/discussion/can-i-claim-money-from-a-529-fund-as-my-supportin...