D18 is at an OOS public in a state with a much lower income tax rate (and the new standard $12000 personal allowance). She’ll have taxable scholarships from that state which wouldn’t exceed her personal allowance there. But our home state (CA) didn’t conform to the new federal tax code and has a much lower personal allowance (and I’m assuming she could presumably be liable to kiddie tax on her scholarship as unearned income at a state level, which would be quite a lot of money, perhaps $1000 per year in 2019).
However, she is staying at school this summer and probably the next few summers as well and will have an apartment there for next year and subsequent years - she’ll spend less than 30 days in CA this tax year and all the work she does for her summer job will be out of state. She already registered to vote in the other state when she turned 18, and can change her drivers license, addresses on bank accounts, etc. (although hasn’t done so yet and she has borrowed our car to take to college, which still has a CA registration). I would be quite surprised if she moved back to CA after college, since its so expensive here.
So I’d be keen to hear advice from other people whose kids moved their tax residency to another state while in college. What steps did you take, when did you do it, how did it work out?
@momofsenior1 Utah allows students to become resident for tuition purposes (by spending 336 days there in a 12 month period, not being declared as a dependent on someone else’s tax return and changing your voter registration and driver’s license). But that’s not my question (it is unnecessary because of her scholarship), I’m talking about tax residency. Any state is happy for you to become tax resident and pay them more taxes, it’s the state you are leaving that doesn’t want you to stop paying taxes there.
So has anyone’s kid shifted their tax residency during college? What are the consequences and requirements? Can they still be declared as a dependent in another state for example (I assume so)? And when did they do it, and is there some overt action that they took to establish that date (other than simply getting on a plane).
Don’t confuse legal residency, which is what OP is asking about, and being eligible for in-state tuition at public colleges.
OP states that his/her daughter has registered to vote in the state where daughter attends college, which generally means that the daughter has declared that state to be her state of legal residence. (I say “generally” because each state can interpret this differently and have different standards for establishing legal residency, but you typically have to be a legal resident of a state to register to vote in that state.) Also, generally, becoming a legal resident of a state means that if you want to drive you must obtain a driver’s license from your state of legal residence, and your vehicles that are kept in that state must be registered in that state. More specifically for OP’s question, it also means that for state income tax purposes you will be considered a resident with the associated tax obligations and privileges.
Generally, the consequences are that you now have the same privileges and obligations as any other legal resident of the state. From a taxpayer perspective, the requirements are that you now file state tax forms as a resident, and not as a non-resident (although for the first year, you will probably need to file as a part-year resident, depending on how the state’s tax laws work).
Are you asking about being claimed as a dependent on someone else’s federal tax return?
Generally, it’s when the first affirmative action is taken to change the state of legal residence. Based on the information you have provided in your daughter’s case, it sounds like that happened when your daughter registered to vote in the new state.
Thanks @BelknapPoint. She turned 18 last November and registered to vote in Utah then (actually she may have registered before that date to be effective from her birthday). So it sounds like she should be a part-year resident of CA up to the date she registered (not when she turned 18 if she did it beforehand), and any scholarship income from Utah in 2018 would need to be apportioned between the states. Is scholarship (room and board) income deemed received on the first day of school (or the date payment would otherwise have been due for the whole semester) or ratably over the semester (so part is allocated to the time she was a CA resident and part to the time she was not)?
She will still be our dependent (we are CA residents) for 2018 and potentially for 2019 as well, since we don’t have any reason not to claim her as a dependent on our tax returns (federal and state) and we do provide more than half of her support (to receive in-state tuition in Utah you need to not be claimed as a dependent, even if you are eligible to be claimed on your parents’ return, but that is not necessary in our situation). I assume that’s independent of her residency and would not be relevant to determining her status?
I have asked her to change her drivers license, but I don’t particularly want to transfer the car to her name or register the car in Utah (it is our car not hers and we have registered it in CA and insured it for the entire family to drive), so hopefully that won’t be an issue. Presumably she should also make sure that the address on things like bank accounts is her Utah address.
OP - Totally misread your post! Sorry! Would love to make that happen for our DD but she’ll be working in various states for her co-op and will be moving dorms every semester. No way to get a driver’s license in her new state even though she’s registered to vote and has her bank account there.
If the billing statement from the school provides a date that the scholarship was applied to her account, I would use that date as the day of receipt, and then proceed with completing part-year resident tax returns for both CA and UT using the date of registering to vote as the break from CA to UT.
The support test is only one part of determining federal tax dependency. I think in your daughter’s case, the critical factor in 2018 will be whether or not she lived with you for more than half the year. Before she became a legal resident of UT, any temporary absence from CA as a student will count as if she was living with you. But once she registered to vote and became a legal resident of UT, it’s hard to make an argument that after that event any time at school in UT is a “temporary absence” from your home in CA, especially with your earlier statement that you “would be quite surprised if she moved back to CA after college.” If she remains a legal resident of UT, it will probably not be possible to claim her as a tax dependent for federal purposes in 2019. See the federal dependency rules on the 1040 instructions, starting on page 20:
She can only be a legal resident of one state at a time. If she registered to vote in the state where she attends college, that should generally be her state of legal residence, no matter what other states she is doing a co-op in and no matter what dorm she lives in. What makes it impossible to get a driver’s license in her new state? Of course, if she’s not driving, she doesn’t need a driver’s license, but if she has one already from another state, she may be legally required to trade it in for a license from her new state if she is going to be driving.
Right! One year, one of our kids worked in 5 states…maybe it was only 4. Regardless…he was only a resident of one of those states. In his case, it happened to be our home state…he was a full time student and at the time, the tax advantage for us declaring him as a dependent was decent.
He filed his federal taxes using our address. Our state taxes were filed as a resident…and the other 3 or 4 had to be filed as non-resident. It was a PITA…but it had to be done as all of his states required filing.
“If the billing statement from the school provides a date that the scholarship was applied to her account, I would use that date as the day of receipt”
The statement shows the room and board charges as being billed on the first day of each calendar month during the semester. I’ll have to find out if the scholarship was applied in the same way. Hopefully that’s the case and then we can separate the scholarship payments before and after the voter registration date.
“But once she registered to vote and became a legal resident of UT, it’s hard to make an argument that after that event any time at school in UT is a “temporary absence” from your home in CA”
So in 2019 will she be able to claim the refundable part of the AOTC (if she pays for summer session tuition using non-529 funds), even if that payment is made with money she receives from us and we continue to provide more than half her support?
Eligibility for claiming an education tax credit on any particular tax return, including eligibility for either the refundable or non-refundable parts of the AOTC, is a whole different discussion. There was a recent thread on that subject here in the FA & Scholarships forum. Read the AOTC chapter in IRS pub 970 for more information on eligibility.
“Read the AOTC chapter in IRS pub 970 for more information on eligibility.”
Yep, did that. So if she pays some tuition expenses out of her bank account in 2019, and is not claimed as a dependent on our tax return, it appears that she will be able to claim the refundable part of the AOTC.
I note that the criteria is “not claimed” as a dependent (elsewhere “not listed”), instead of “not eligible” to be claimed as a dependent (which I hadn’t realized). That appears to suggest that in some circumstances (not those of my D but potentially my S) where the parent’s income exceeds the qualifying MAGI the parent can choose between getting the $500 federal credit by filing with your kid as a dependent and choosing not to file with the kid as a dependent so that they can claim the refundable AOTC for themselves (assuming that the tuition money came from the kid’s bank account and not from a 529 since the eligibility rule refers to “you pay QEE…”). If that’s correct, I’m surprised more people don’t do it that way…
-Payments of QEE by you or anyone else for your daughter’s benefit, either directly or through your daughter, are treated as paid by your daughter as long as she is not claimed as a dependent on someone else’s tax return. See the instructions for IRS form 8863, pg. 2:
-In order to claim the refundable part of the AOTC on her own tax return, your daughter’s earned income cannot be less than one-half of her support. That’s probably a major reason why more people don’t do it that way. See page 6 of the form 8863 instructions linked above. The IRS definition of “earned income” for claiming the refundable part of the AOTC was a matter of discussion in the thread I mentioned earlier.
OK, that’s what I had missed. It’s only refundable for a student if they provide their own support.
One last question, being self-employed, we have been able to take an above the line deduction for health insurance premiums. I assume that will no longer be an option to pay the premiums for my D once she isn’t a dependent?
Hmmm… I don’t want to think that you are relying on advice without verifying, and I’m not familiar with your immediate situation, but… I have a kid who is tax independent but is still covered under our (parents) health insurance because she is under 26. The premiums are paid part by a parent’s employer and part by a parent through a cafeteria plan (pre-tax), so it differs from your self-employed situation with an above-the-line deduction. That’s the best I can do. There are similarities, but I don’t know the answer for your specific situation.
Edited to add:
See page 90 of the 1040 instructions regarding the self-employed health insurance deduction on line 29 of schedule 1.
*Line 29
Self-Employed Health Insurance Deduction
You may be able to deduct the amount you paid for health insurance for your-self, your spouse, and your dependents. The insurance also can cover your child who was under age 27 at the end of 2018, even if the child wasn’t your dependent. A child includes your son, daughter, stepchild, adopted child, or foster child (defined in Who Qualifies as Your Dependent in the Instructions for Form 1040).[I/]
Thanks so much. That raises the complication that if the kid is covered on the same plan as the parents it is definitely deductible, but if it’s a separate plan (through her college in this case) then it might not be. Our situation is a bit more like yours (paid through a single employee C corporation not a Sch C, but one that doesn’t offer a health plan just reimburses expenses/premiums), I was just trying to short circuit it by saying we are self employed.
“Accident or health plan. This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27 at the end of the tax year) in the event of personal injury or sickness. The plan may be insured or noninsured and doesn’t need to be in writing.”
So it would appear that a C corp can use essentially any arrangement they want to provide healthcare for employees’ children under the age of 27 with pre-tax dollars.