<p>Our son earned $4400 in 2013 at his part time job and had taxable financial aid income of approx $3700 (tuition/fees minus qualifying expenses). We met with our CPA yesterday and he stated that we should remove our dependent son from our tax return and have him claim himself which would result in his not having to file an income tax return because he would be below the threshold when you account for both the personal exemption and the standard deduction. He mentioned that our son was contributing to most of his support which is true due to a low EFC, a generous financial aid package and his job. My question is:
Can a student's financial aid (primarily fed and state grants) and two loans be used in the IRS support formula when trying to determine who gets the exemption? Will it be a problem on the updated FAFSA when it indicates two exemptions instead of three? I also read in another post that if the student claims himself on his own tax return that it can possibly result in problems for the student with regards to insurance coverage under the parents' plans for medical, auto, etc. This is the first time I have heard of this -- is this correct? If so, it would definitely create additional problems. Appreciate your input with regards to these subjects! </p>
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I think IRS considers grant as scholarship. See IRS Pub 501
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<p>Scholarships do not count toward the support (a CPA should know that). So in most cases. a student will not be providing >50% of their own support unless they have a high earned income or a high amount of loans in their own name. If most of his FA is grants/scholarships (same thing from a tax POV), it is likely he is still your dependent, though you would have to run the numbers. </p>
<p>It used to be that not being claimed as a dependent on taxes could cause problems with keeping a student on your medical insurance. Under Obamacare, the new rules mean your child can stay on your insurance until he turns 26. We never had any issues with our kids being on our auto insurance. Probably something to discuss with your carrier. (Probably a moot point unless you find your son actually is providing more than half his own support).</p>
<p>I don’t know a single car insurance company that asked for tax returns, and the new rules with health insurance permit him to stay on there until he turns 26. I think you need to get help at an IRS office and run the numbers with them, because it is possible your CPA is mistaken here. As others have said, the grants and aid are not taken into account and 4kidsdad has given you a site. It is possible that you will do better on the whole with him not as a dependent but you also need to taken into account possible tax credits, etc to get the bottom line. Something we can’t do for you without all the first hand info on the table. So I urge you to get a appt with an IRS office and go over your situation and your son’s. Even if he owes a bit in taxes, what you might gain from him being a dependent and for what was paid or borrowed (which counts as paid) you might get a tax credit and that may be on the whole better for you and him. </p>
<p>I am not a tax expert. But I believe if your son is below the income threshold, he doesn’t have to file a return regardless of YOU declaring him as a dependent. Our kids worked in HS and college, never reaching that limit. Some years they did NOT file their own taxes simply because they had no or very little taken out in deductions. They were our dependents until age 24.</p>
<p>Thanks for the replies. Our accountant told us that having our son as a dependent on our income tax return was not going to make any difference for us financially so if our son claimed himself and filed his own return it would help him and eliminate the need for his needing to file a tax return. I didn’t realize until this year that in order for a child to claim himself, he had to provide more than 50% of his support. But, I also know for a fact that we aren’t providing that much. As I said before, he is taking care of almost everything with his financial aid and part-time job. He does have his two loans (more after this year) but he hasn’t had to use those monies yet. So I guess my question is, if IRS doesn’t believe he should be able to claim himself but we aren’t paying out much for our son’s college education, then what? Do we have our accountant put him back on our return as our dependent and he will then need file his own income tax return due to being over the threshhold for wages – possibly owing a small amount in taxes? </p>
<p>4kidsdad’s quote about scholarships/grants not counting toward the support a student provided themselves is from page 15 of IRS Pub 501:</p>
<p><a href=“http://www.irs.gov/pub/irs-pdf/p501.pdf”>http://www.irs.gov/pub/irs-pdf/p501.pdf</a></p>
<p>You need to go through the worksheet on page 16 of that Pub. You do need to include the amount of his student loans on line 1 of the worksheet though and that amount would be included in the support he provided himself.</p>
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<p><a href=“Tax planning for parents of college students”>http://www.journalofaccountancy.com/Issues/2012/Mar/20114558.htm</a></p>
<p>Did you pay any out of pocket expenses for college in 2013? If you did, by claiming him as a dependent you may be able to take the AOC for them, though your son would have to report that amount as additional taxable scholarships. IRS Pub 970, Chapter 2 has the details, especially starting on page 12 with the quote:</p>
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<p>and through the 2 examples on page 13. The CPA or you should run the numbers both ways if you believe the support test is met.</p>
<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a></p>
<p>Thumper, given the numbers the OP gave, the student is over the $6100 for having to file if the parent’s claim him as a dependent.</p>
<p>Just a note about the age 26 medical insurance provision for children. It doesn’t apply to all insurance policies. One major exception is retiree policies through an employer. </p>
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You still could claim your son, as long as he did not provide more than half of his supports. See Worksheets 2 in Pub 501.</p>
<p>Took me a while to compose my post and saw your update afterward.</p>
<p>If your son took out loans but didn’t actually spend them on his support, i.e. that amount is sitting in an account somewhere, then that amount isn’t support he provided himself.</p>
<p>IRS Pub 501, page 20:</p>
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<p>Look at the support worksheet. You are allowed to take his share of the fair market rental value of your home, for example, as support you provided. There are other things you can count as support provided. He is considered temporarily away for the purpose of education.</p>
<p>I think the whole point to this is that according to our accountant, it will be beneficial for all of us if our son can claim himself for 2013. He seemed to think that our son qualified although I’m not sure what exactly he was using as his criteria – I’m having to give him the benefit of the doubt since he’s a great cpa. I think I just became more confused when I started researching the dependent exemption. I am wondering though if going from a “3” exemptions to “2” on our tax return will affect his EFC or financial aid in any way. It won’t affect our income tax return. </p>
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I don’t think so. The household size in FAFSA stays the same, regardless your son claims his exemption or not.</p>
<p>I won’t tell you to distrust your CPA or to take advice from strangers on the internet.</p>
<p>But one last item I want to point out. From page 11 of Pub 501:</p>
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<p>With scholarships/grants not counting, with loans not counting if the amount isn’t spent on support, with a relatively low earned income and with the generous amounts allowed for parents to claim as support on the worksheet(I think you are underestimating how much you can claim), I would be surprised if your son provided over 1/2 his support. But I don’t know all the numbers.</p>
<p>But your son can’t claim his exemption just because you don’t, nor do I think he can avoid filing using the exemption amount unless you actually can’t claim him. I think you or your CPA need to actually calculate the support.</p>