@NJEngineerDad Those aren’t the only tests for the dependent credit (I agree that you would usually be providing more than half their support since this excludes scholarship income). To be a qualifying child, the student must live you more than half the year (including temporary absences), but if they’ve moved permanently to another state then they won’t pass this test after the first semester. If not a qualifying child then they could instead be a qualifying relative, but then there is a limit of $4150 in total income (in 2018, which apparently does include the scholarship income). So the student generally won’t qualify under either category.
@BelknapPoint your thoughts?
I didn’t think the absences for college attendance counted as failing to meet residency in the home state of the parents.
Maybe we need a whole thread in the Parents Forum on college students and taxes. This is getting pretty off topic to this thread.
My point in mentioning the taxes for things that are not QEE is that some folks totally forget about this and then are gomsmocked when their college kids do their taxes and have to pay using the kiddie tax guidelines. If the family budget is very lean…an extra $2500 a year could be a lot.
Typically, the “no loan” schools expect a student work contribution of around $5k, and allow outside scholarships up to that amount to replace the expected student work contribution, lowering the net price.
If the student has all qualified education expenses paid through scholarships, grants, or other tax-free educational assistance, federal education tax credits will not be available (no double-dipping allowed). Scholarships and grants that are used to pay expenses that are not QEE (typically room and board) will generally be considered taxable income to the student.
Correct; a temporary absence for education purposes does not count as time away from home for the IRS qualifying child test. I think this is what Twoin18 is saying.
@BelknapPoint I am confused. What are the criteria for a out-of-state student to become independant for federal income tax purpose? Does getting a new driver license transforms the absence from a temporary to a permanent absence?
Don’t conflate in-state or out-of-state status for tuition at public colleges with IRS requirements to be classified as a tax dependent. That being said, it may be difficult to call an educational absence from the parental home “temporary” if the student has taken sufficient affirmative actions to make another state his/her legal residence.
If you haven’t already done so, it may be helpful to read through the “Dependents” section of IRS Pub 17 (starts on pg. 25):
It is very easy for an 18 year old adult to establish residency in any state in the US. The discussions above are if the parents want to continue to take the student as a dependent. The student can file taxes in the college state as a resident, register to vote there, have a car registered there. The parent would have to determine if the child is still a dependent child under the IRS rules, which are different than residency rules. And different than residency for instate tuition purposes.
I don’t really see how this instate residency for taxes discussion relates at all to @KevinFromOC hunt for an affordable college for his high achieving daughter.
My point in bringing the subject up at all was just to let him know…some of her aid could very well be taxable and they need to consider that in their budget, especially if the budget is really tight.
Can we move on?
I am clear about in-state or out-of-state status for tuition at public colleges having no direct link to state residency. The discussion started with @Twoin18 revolves only around income taxes (at the state and federal level).
Scenario is as follow: parents live in a high state income tax place like CA or NJ. Child gets a full ride at a university in a low (or no) state income tax state. It is clear that the room and board part of the scholarship is taxable at least at the federal level (although I am not clear what form is used by the university to report that income).
My understanding is that under the new law child has to pay federal income tax at a fixed rate on that. Is that correct?
Now child does not want to pay the state income tax in the state where the parents live. Child wants to become resident of the state where he attends school. Child gets new driver license. Is child indeed now able to pay state income tax where s/he attends school rather than in the state where the parents reside?
Assuming child has succeeded getting residency in the state where s/he attends school, and the parents still support the child (e.g. provide healthcare, pay for plane tickets, etc), is the child still a dependent at the federal level?
@NJEngineerDad Students cannot claim scholarship $$ as their own support. It is pretty much impossible for students not have to pay taxes at their parent’s highest marginal tax bracket unless they have a pretty high paying job. Undergrad research pay (including internships/REUs) are considered grant $$which is also not eligible to be counted toward their own support.
@Mom2aphysicsgeek Thanks. I am also clear about the fact that students cannot claim scholarship as their own support (as I mentioned earlier). And now I would expect them to pay tax on the taxable part at the estate rate.
But I dont see how it helps answering all my questions. Somehow I seem to be missing something 
@Mom2aphysicsgeek they changed the tax laws, parental income is NOT a factor all taxable scholarships are figured at the estate rate no matter if parents have zero income or are millionairs.
@thumper1 Ok to move this thread somewhere else. Sorry. But as you mentioned down the road @KevinFromOC (or rather his daughter) will have to pay some taxes. Trying to minimize the amount due is good planning.
@NJEngineerDad I stated the rules to receive a dependent credit above, either a) to be a qualifying child you must live with your parents half the year (and if you have moved your permanent residency to another state, which is part of becoming non-tax resident at your parents’ home, then that would seem to be infeasible) or b) if not a qualifying child then to be a qualifying relative you must earn less than $4150. If the aim is to limit taxes on a large taxable scholarship then b) is also unlikely/impossible.
So yes the student can become tax resident of the new state to save on taxes at a state level (any federal tax paid on the scholarships by the student would be unaffected), but the savings will be offset by loss of the $500 dependent tax credit that the parents would otherwise be able to claim on their own return.
@Twoin18 Thanks! I get it now…
The parent would also not be eligible for any of the college tax credits if they don’t declare the student as a dependent. IIRC, one of these can be in the $2000 range.
@thumper1 The point of doing this is for a student with a very large taxable scholarship (ie tuition is already covered and the taxable part is covering room and board). So the parent would presumably not be paying any eligible expenses that could be used for college tax credits (though I suppose you could declare even more of the scholarship to be taxable for AOTC purposes).
But I agree that there are only very limited circumstances where moving the student’s state of tax residency makes financial sense (generally going from high tax non-conforming states like CA to low tax states on near full ride scholarships, when the parents have a fairly high income so their marginal tax rate is high and their eligibility for various dependent/college tax credits is limited).
The American Opportunity Credit maxes out at $2,500; the Lifetime Learning Credit maxes out at $2,000.
Well…the tax credit thing might be a moot point anyway if the family income is above a certain threshold. With a $30,000 EFC, it’s very possible this family income is too high to qualify for any of the college tax credits anyway.
Anyway…just an FYI…that federal income taxes might need to be paid if scholarships exceed QEE. Be prepared.