Dependent status for students and new tax law

Has anyone considered whether the new tax law now makes it more advantageous for their student to not be classified as a dependent for tax purposes in certain circumstances? After all there is no dependent exemption any more.

If the parents are above the income threshold for college-related tax credits and particularly if kiddie taxes would be due on scholarships or other unearned income, it seems that it would now be better for students to provide more than 50% of their own support if possible, in order to minimize kiddie taxes and/or claim college-related tax credits on their own tax return? But I haven’t seen any articles about this issue. Has anyone changed their plans for this year?

Related issue: it seems very unclear whether 529 disbursements are parent support or not, if they are distributed to the student or sent direct to the school. If they are deemed to be from student assets then (if desired) it would be relatively easy to end up with more than 50% of the support (including 529 disbursements) being attributable to the student.

The student will get the $12000 standard deduction and the parents will be able to claim a $500 credit for the college student dependent. $12000 would have been enough to cover my daughter’s scholarships, but when her standard deduction was ~$6400, she was paying taxes on about half of her income/scholarships. So that’s one new benefit.

It would certainly be nice not to deal with the kiddie tax but it’s a long way to prove independence unless the full scholarship student has a pretty good paying job.

“It’s a long way to prove independence unless the full scholarship student has a pretty good paying job.”

Not if there is money in a 529 and that is a deemed asset of the student (hence the second issue). That can be used to pay for support (and withdrawn free of penalty if less than the scholarship) and then tax is presumably only due if total earnings exceed the standard deduction.

If you are using 529 to pay support, the scholarship is used for tuition and other QEE, how much tax is there to pay that isn’t covered by the $12k standard deduction?

But the student only gets the $12K standard deduction for unearned income if they are not a dependent. Otherwise kiddie tax is payable at trust rates above $2100 of unearned income on the portion of the scholarship that goes towards room and board (and perhaps on the non-QEE 529 withdrawal too). So my assumption is that the non-dependent status becomes a critical issue.

But for the purpose of determining the standard deduction, and ONLY for that purpose, the scholarship $$ is considered earned income. So say the student receives $6k in non QEE scholarships and earns $6k in the summer. That student’s standard deduction is $12k. If the student has $6k in non-QEE and $8k in earned income, there is going to be some taxes due and I don’t know how it is figured with the new kiddie tax rules. I’m thrilled that this was my daughter’s final semester in college so she is independent for 2018 and she’ll just report the non-QEE amounts as her unearned income, but in the past the tax software figured it out for us

I don’t think that is correct. A scholarship that is more than QEE is unearned income: https://www.thetaxadviser.com/issues/2016/apr/kiddie-tax-may-be-due-on-college-scholarships.html

And “For 2018, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,050 or the sum of $350 and the individual’s earned income.”
https://www.google.com/amp/s/www.forbes.com/sites/kellyphillipserb/2018/03/07/new-irs-announces-2018-tax-rates-standard-deductions-exemption-amounts-and-more/amp/

So if a dependent student has some earnings (more than $700) they will pay tax at trust rates on anything over $350 of non-QEE scholarships (or interest on savings etc). I think it becomes quite important for them to not be a dependent in those circumstances (assuming the parent isn’t eligible for college related tax credits).

https://www.thetaxadviser.com/issues/2016/apr/kiddie-tax-may-be-due-on-college-scholarships.html

As I said, the tax software all treated the scholarships as earned income for the purpose of the standard deduction for my daughter for the last 4 years. She got the ~$6400 as a standard deduction and for at least 2 of those years, her only income was the scholarships. In all 4 years, her unearned scholarship income was much higher than her earned income, and she always got the full standard deduction.

@BelknapPoint

What?

So it appears I misunderstood above: the non-QEE scholarship is unearned income for the purposes of calculating kiddie tax, but is earned income for the purposes of calculating the standard deduction. Wow this is complicated!

So the student’s standard deduction if a dependent will be earned income (from a job) plus their non-QEE scholarship plus $350, the total not to exceed $12000.

In most cases (without a huge scholarship or significant additional earnings) it therefore seems no tax will be due. Then the benefit from being a non-dependent will be minimal unless the student wants to claim the refundable part of the AOTC because the parent can’t.

And it appears the increased standard deduction in the new tax law is a big benefit in reducing kiddie tax on non-QEE scholarships (especially as the room and board component of a full ride will usually be more than the old $6350 deduction). It actually means there are fewer situations in which ensuring the student is non-dependent is worthwhile.

For us it is not advantageous to not claim our daughter as a dependent on taxes.

First, we can claim one more year of AOTC, even if we can only claim fees of about $1,000 (she has a tuition scholarship).

Second, we will get a $500 dependent credit for her.

And third, if she gets more than 50% of her support from us, she counts as a second student in college, and reduces our FAFSA EFC by half, making both her and her brother eligible for a state grant.

Next year she won’t be eligible for the state grant, but her brother would be, if he has a lower EFC due to her being a second student in college.

Also while the AOTC can only be claimed for 4 years, we might be able to claim the lifetime learning credit.

If you do want your child to be independent for taxes, and not be subject to kiddie tax, I think they have to have earned income, and spend it on more than 50% of their own support.

Third party support like grants and scholarships doesn’t count for either parent or student provided support.

Student loans taken out by the student and spent on education expenses could count as student provided support.

Read the rules for claiming the refundable part of AOTC and kiddie tax rules again, they are quite complicated as well.

My understanding is the independent student can’t claim the refundable part, but can use the AOTC to offset any tax actually owed (nothing is refundable). I took the 4 years of AOTC for my daughter who graduated, but she may be able to take the lifetime learning credit for 2018 expenses paid. I haven’t investigated how that works.

The lower income limits for lifetime learners credit meant we couldn’t use it for oldest D in grad school when she still was dependent. We were at top income to get anything on AOTC but more than limit to use LLC. But the next year she was independent and able to use it. Will vary according to family income I think.

^^Yes, I think daughter will be able to use it this year because she’ll only work her job for 5 months, but she may not have any qualified expenses anyway. One year it took me 3 days of pretty steady work to do the taxes for me and my 2 kids, which were really very simple except for the tax on scholarships. One tax software program would work for one, but not for another, and if I changed something on one, another would need to be changed too.

I expect next year to be similar to water boarding torture.

The $500 “child tax credit” is tied to income, pretty low income, so don’t count on your college student qualifying unless they hardly work at all. In addition, unless the law is amended, as it currently reads, the income threshhold is zero. Even if they fix it, the earnings limit will most likely just be a few thousand dollars.
https://www.marketwatch.com/story/have-kids-5-ways-the-new-tax-law-affects-you-2018-02-21
Also, the $500 is nonrefundable.

I don’t think this is correct. My understanding is that the parent income phaseout for both the qualifying child tax credit (up to $2,000 for dependent children under age 17) and the non-qualifying child tax credit (up to $500 for other dependents) begins at $400k for married filing jointly taxpayers and at $200k for all other filers. This is not low income. Also, the income limit for the actual dependent in claiming the $500 credit appears to be for non-child relatives who are claimed as dependents, and does not apply to dependent children, as pointed out in the article that you provide a link for:

Apparently, these non-child relatives will only qualify for the $500 credit if they have no gross income for the year, because the tax-law language says they cannot have gross income in excess of the dependent exemption deduction amount. For 2018-2025, the dependent exemption deduction is deemed to still exist, but it equals $0.

My feeling is that 529 distributions used for the benefit of a student that come from a 529 account that is not owned by the student must be considered support provided by someone other than the student (it doesn’t matter if the distribution is made to the student or directly to the school). On the other hand, if the 529 account is owned by the student, whether as a regular 529 account if the student is not a minor or as a custodial 529 account (UTMA/UGMA) if the student is a minor, this would be considered the student providing his/her own support.

For eligibilty for the $500 child tax credit, I believe that one’s child over age 17 is a “non child relative” that my quote refers to. I won’t comment further as we probably won’t know final details till tax season. Just an FYI to not count chickens before they hatch.

Full-time college students currently have different age limits to be eligible as dependent children, I hope that will continue.

A child 17 and older is not a “non-child relative,” even for purposes of the tax code.