So confused about taxes and dependent status for grad school daughter receiving stipend - can anyone help?

Parents Forum
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I am really hoping that someone here has experience with this. I have been doing my own taxes for years and do not have a CPA to advise me. That said, I have been trying for the past year or two to find a CPA for tax advice and either no one calls me back or I get people who only do returns and don’t give advice or I get people who will do my taxes and give me advice for some ridiculous 5-figure yearly fee. I’m still looking for someone local but in the meantime, I thought I might post here because I’m sure I’m not the first parent to encounter this. I apologize in advance for the length of this post, but it is a bit of a complicated situation. I’m basically just trying to figure out if I have to declare her as a dependent or not, if she is allowed to file as an independent and get the education credits, and if she is subject to kiddie tax.

My daughter is 22. She graduated undergrad in May and just started a fully funded PhD program in a different state on the other side of the country. As part of the requirements for the graduate program, she has to get residency in that state (California) – it’s a public school and the program is covering her tuition so I guess they don’t want to pay more than they have to. They gave step by step advice for getting residency and so far my daughter has changed her permanent address and gotten a DL in that state. She will be registering to vote and setting up a bank account there within the next few weeks and will be filing state taxes there from now on. According to the school, 366 days after doing these things, they will consider her an in-state resident. Seems pretty cut and dry so far.

First issue: I am not sure whether she should be considered a dependent on my tax return this year. I would prefer not to declare her and let her be independent – we make too much to be eligible for any of the education credits but I think on her own she would be. But according to what I can figure out from reading IRS publications, in order to not be a dependent, she has to be providing 1/2 of her own support and cannot have lived with me for more than half the year (and they count being away at school as living with me.) And while I know I don’t have to declare her as a dependent, apparently if I CAN declare her, even if I don’t, that may negate her ability to receive the education credits like the AOC etc? I’m not sure because like I said, we’ve never qualified for those so I don’t know how they work. I’m not even sure she’d be eligible since we paid her tuition in undergrad with 529 funds and the grad program is paying her graduate tuition.

But anyway, the dependency question is where I’m getting really confused. She was in undergrad until May of this year. Her tuition and living expenses while in school were paid via her scholarship (which covered most of her tuition but none of her room and board) and our 529 plan and the disbursement was made out to me. She had very limited part time job that paid her via W2 and another one that paid her as a 1099 contractor, but total earnings are probably less than $1-2K. The IRS is apparently vague about whether 529 plans count as the student’s own support or parental support but since the disbursements were paid to me and I paid the bills, I’m assuming that would be considered parental support.

She is getting paid a nice stipend by the graduate program (about $3700/month before taxes starting in September of this year, so a little less than $15K total for this year), but it is not W2 income – it is apparently going to be listed as a scholarship refund on a 1098-T. So again, while that may count as her own support, it is not technically “earned income.” I also have a lot of money left in her 529 thanks to her undergrad scholarships, so I have been pulling out the full amount the college allows monthly for room and board from the 529 and sending that disbursement directly to her to supplement her income as even though her stipend is generous, she is in a very HCOL city and living on the stipend alone is a stretch. That may count as her own support since the disbursement is in her name - I’m not sure and the info I found on the internet said the IRS has not given any guidance and you could argue for it either way so that is unhelpful. So ultimately, I’m confused about how to know whether she’s providing 1/2 of her own support - a lot of it seems to depend on how the 529 plan disbursements are counted.

I’m also confused about the requirement to “live with me for more than half the year.” She graduated in May and spent the summer traveling around to different friends’ houses, living off her savings and relaxing between undergrad and the start of grad school, so she wasn’t living under my roof and but also didn’t earn any extra income. Then she immediately moved to her grad school housing. So she did not technically live with me for half the year (only til she graduated mid-May while she was away at undergrad) although her DL and permanent address didn’t change until September. So I’m not sure if she meets the residency requirement for me to declare her. If she isn’t considered has having lived with me for half the year then apparently I can’t declare her and she does not have to check the box for “Can someone else declare you as a dependent” but again, I’m not sure exactly how they measure this. Can I even declare someone who has a permanent address 3000 miles away from me? And even if I can or have to declare her this year, I certainly won’t be able to next year unless they are going to consider her as being away from home to attend school, but that seems to contradict that whole point of getting CA residency which the school insisted on. So like I said, I’m confused!

She has also been on our health insurance all year. She got her own plan paid for by the grad program that started September 1, but recent claims still seem to be being paid by our insurance so I’m not sure exactly what is going on there. I’m not sure how health insurance status affects dependency or if it is considered parental support. Insurance is the same price for us whether she’s on our insurance or not (we still have to cover her brother and it is the same price no matter how many kids you have) so I figured I’d leave her on our insurance next year as well if I could but I’m not sure if I would allowed to if she’s not a dependent and not living in our household and she does have her own policy in CA paid for by the school. We’re going to hit open enrollment for our employer plan soon so I need to figure this out ASAP and I guess she’d come off our insurance in January if we don’t keep her on for next year.

Finally, as an extra complication, apparently because she’s only 22, she is apparently subject to kiddie tax, meaning all of her unearned income will be taxed at our rate. This seems to apply whether we declare her as a dependent or not, whether she lives with us or not, etc. Which seems really REALLY unfair because all of her stipend is considered unearned income and thus subject to kiddie tax because of appearing as a scholarship refund on a 1098-T. This means that instead of being taxed at the rate for someone making $48K a year, she will be taxed at our rate - a LOT higher. Even though she has a permanent address and drivers license and a completely independent life in California, 3000 miles away. And this will apply for the 15K she makes this year and for the full amount she earns next year – all the way until she turns 24 in 2025. I really find this hard to believe, but everything I’ve researched says its true. Our tax bracket is 35% I think, so this is taking over a third of her stipend right off the top - seems very unfair and certainly means she wouldn’t be able to survive out there without the extra 529 money. And she’s not allowed to work a W2 job or make any other income outside of the stipend - that is part of the condition of the funded program.

So if you’ve made it this far, does anyone have any thoughts on how declaring or not declaring her as a dependent (for both this year and next year) could impact her ability to be on our health insurance and her ability to claim education credits like the AOC. And how the 529 plan withdrawals factor in? (I assume I can still take money out of the 529 even if she’s not a dependent.) And is there any way (other than her getting married which is the suggestion I found on the internet!!!) to avoid the kiddie tax on her stipend? Does anyone else have kids attending grad school with a stipend like this that could offer any guidance? Thanks so much for taking the time to read this!

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definitely not an expert, and am interested in seeing other answers but I am pretty sure the kiddie tax would only apply to dependents- so I would not claim her as a a dependent- can’t imagine there’s a rule that says you have to do that.

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I’m not a tax person.
I’m a resident of California but have worked with my former high school students on funding resources to go to school at our state publics.

From what I understand, in order to qualify for instate residency, she has to file everything under her own name and start keeping records of her expenses. Those expenses have to match her income.

She needs to make an appointment with the Residency Determination Office to get her paper trail questions answered. It sounds like her residence start date was in September.

That means that her health insurance has to come from the university, not from you.

Her 529 is a bit of a puzzle, because, legally, it’s hers.
No more funding from you if she is to meet that 366 days of independence.
From January to May, you provided living expenses. That’s 5 months. Stop having the 529 dollars sent to you because that would be viewed as support from you.
She needs to access that account directly and she has to file that on her taxes. The 529 may be considered as a savings? You have to ask the 529 office.

The universities do have some tax people available at the universities. She needs to access them because they want to see her name on the paperwork, appointments, receipts.

Whatever SHE makes for the stipend, is her income and she needs to report it on her taxes.

Do not Venmo any money to her to “help”. Her stipend and savings have to match her expenses or that instate residency will be denied.
Again, this is just my opinion. Please have her find a resource in California for your questions. She can ask at her university.
Good luck!

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@catmom94 You would think so, but I swear I saw that dependency status doesn’t matter…which I guess makes sense because parents trying to be shady and hide assets by transfering them into their kids’ names would likely reap more money in tax savings on the earnings than they’d lose by not declaring the dependent. According to the internet, the only things that get you out of the kiddie tax are being older than 24, being married and filing a joint return, or having both parents be dead. I’m hoping that’s wrong but not holding out much hope - I found it in multiple places. Still maybe someone here will have some insight… :crossed_fingers:

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@aunt_bea Thanks for this detailed reply - it is definitely helpful! She wasn’t told anything about expenses needing to match income but that does make sense. Honestly the tuition (whether in state or out of state) isn’t coming out of her pocket so the residency is really just a way for the program to save some money - it’s basically one department of school paying the bursar at the school so I don’t know if they just aren’t as strict in this case or what. They only said she had to transfer her drivers license, pay state taxes, register to vote, get a local bank account, and not leave the state for extended periods (which won’t be an issue since she is expected to work full time year round as part of her stipend - it’s not like she could come home for summer break because she doesn’t get one.) I did have the 529 disbursement she’s gotten since starting grad school sent directly to her and will continue to do so. And yes, she was planning to file all this income under her own name but I have been the family accountant for years – I do everyone’s taxes for them – so if I accidentally phrased something as “do I file” I really mean “does she file” except I am the one filling it out and she is just signing her own return (and paying the tax due). That’s why I’m trying to figure all of this out now. I know her university has some tax guidance online that she’s pointed me to (that’s where I first heard about this kiddie tax business!) but it doesn’t seem to be super helpful. I’m not sure they have people who will actually prepare her taxes for her (although if they do, and I can step down from my role as her accountant, I’d be thrilled!!!) Anyway, thanks again for the reply! I will ask her to see if there’s a tax office or residency office at her campus to ask these questions to.

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I think if she is expected to work for her stipend, it becomes earned income and not subject to the kiddie tax. See: The kiddie tax and unearned income from scholarships

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So we had something a bit similar with D18 as an undergrad, when she had a full ride scholarship including money for room and board, and we decided it was better from a tax perspective for her to become a resident of the state she was going to college in (it meant her stipend was not taxable in CA which would have been much more costly than in Utah).

That meant she wasn’t living with us and although we claimed her freshman year (based on living with us for more than 5 months), we didn’t do in subsequent years. And for her own tax return she reported herself as a tax resident in Utah from the date she got a drivers license/registered to vote. Basically the first action that she took to abandon her original residency.

Being independent for tax purposes is not one of the requirements for residency as a graduate student. Compare:

with https://registrar.berkeley.edu/tuition-fees-residency/residency-for-tuition-purposes/residency-requirements-undergraduates/

Only the undergraduate requirements mention independence. So you can give her money and declare her dependent on your tax return if desired/necessary. If she didn’t make any conscious effort to abandon her residency in your home state while attending college, then she would be deemed to be temporarily away at college. That meant until graduation her residency was with you (presumably 5+ months of the year) and she likely qualifies to be dependent in 2023. In 2024 of course she won’t be since she is permanently in CA. For tax purposes she should file as resident in your home state until she abandoned that residency to move to CA last month. But giving her support doesn’t matter at all for any of this: it’s where she resides that determines residency, not whether she is a dependent.

So on to the tax issues. Yes, kiddie tax will be a problem - we had this with D18 and couldn’t take withdrawals from her 529 until the year after she was no longer a full time student (i.e. not in the year she graduated). From a tax perspective, you can use 529 funds to pay room and board up to the allowed amount (looks like that is $25K-$29K per year for graduate students at Berkeley https://financialaid.berkeley.edu/how-aid-works/student-budgets-cost-of-attendance/) without any tax consequences (regardless of the scholarship refund assuming its usage isn’t restricted in some way). The “excess scholarship” funds will be declared taxable, along with her prior W-2/1099 income. She will fortunately get the full personal allowance (unfortunately that is a lot lower in CA) but after that, as you note, she will unfortunately be taxed at your marginal rate (both for federal and state purposes). But because you can draw lots of money from the 529 without tax consequences, you should have enough to pay for this. And if she can’t work for income (or have some of her stipend paid in exchange for TAing to make it earned income) she probably can’t pass the support test to get out of the kiddie tax until she’s 24.

Health insurance only matters as far as your own insurer’s rules: i.e. they presumably only cover dependents so she will probably have to be dropped from January. It shouldn’t matter that the two policies overlap (unless there is extra cost to you and you want to stop it sooner).

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@BelknapPoint your thoughts…

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In order to meet the University of California residency requirements, graduate students must be in an eligible immigration status and satisfy the “Physical Presence” and “Intent to Remain in California” requirements by the residence determination date, which is the first day of instruction.

Note: If you do not relinquish out-of-state ties and establish California legal ties by the deadlines, you may not be classified as a resident for tuition purposes when you apply for residency.

It’s confusing because some CA schools will make it “difficult” to establish residency. I was always and often told that the stipends would provide the support to indicate “income” which would indicate “independence” and cut from non-resident ties.

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If your insurance is a group (family) plan, she can remain on it until age 26 and doesn’t have to be a dependent to do so. In fact,she can be married, have children and still remain on your group policy (the spouse and children can’t be on your policy) and it may cost you no more to have her on your policy if you have other children or if the premium is based on, usually, the employee plus family.

People move to other states all the time and you just file taxes as partial year resident. I moved to California one year in July and filed partial year (or non-resident? can’t remember) in Colorado and California gave me credit for the money I’d earned in Colorado Jan-June, and I paid in California for the rest.

Why not transfer ownership of 529 to daughter then it’s her savings and any money pulled out hers to deal with on taxes.

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@CMA22 That’s interesting. Everything I have read says that if it is reported on the 1098-T it is considered unearned but you are right - she is expected to work for it and in fact is forbidden to have any other outside employment. So I wonder if that does classify it as earned income somehow - the link you posted seemed to ramble a bit and I wasn’t able to discern what they had ultimately concluded…there was a lot of “the courts may consider” and “quid pro quo” and other legal mumbo jumbo that I couldn’t quite find my way through.

@Twoin18 Thank you so much for this detailed reply. She is not at Berkeley but the link you posted is pretty much identical to what she received from her university as far as residency goes, and it is good to know that I don’t need to keep track of every penny I might send her – that was freaking me out a bit. It does suck that so much of her income will go to taxes (I know CA has a very high state tax too…) but I am grateful that she will have that extra 529 income to supplement. Honestly, I don’t see how she could afford this level of taxes on her stipend alone. I know she is hoping to TA at some point (which would generate a W2 and wouldn’t have this issue) but I’m not sure she’d be allowed to until she completes her first year and at any rate her university doesn’t have undergrads so they don’t need as many TAs…I think there’s an expectation that you will TA the dental students (which seemed bizarre to her since she is not a dental student :slight_smile: ) for a partial year at some point during the program but usually I guess that’s much later on once you have more seniority over the incoming dental students. I guess she will have to budget carefully to make sure she has enough for the unpleasant tax surprise come April.

I definitely appreciate everyone’s input - please keep the ideas coming and especially if anyone knows if the fact that she does have to work in a lab year round for the stipend might possibly be enough to move it to the category of “Earned income” even though there’s no W2 involved. I’m guessing it’s not because like I said, I first learned of the kiddie tax issue in the tax information pages of her university and I assume they probably know what their stipends are classified as.

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Once she can TA then providing half of her own support may become much easier, since scholarships are ignored for the purposes of this calculation. It is only the money you give her compared to what she earns herself. I would certainly gift her ownership of the 529 before the end of this year if you can, then you would not be providing her with additional support in 2024 and beyond. Even if she only has very modest earned income (say in fall 2024) then you should be OK for next year. And she only has one quarter/semester of scholarship money in 2023 so you might be lucky and stay within or close to the $13850 standard deduction this year.

Note also that any costs associated with her health insurance (if she stays on your plan) count as support, so its a good idea to make sure she’s off that starting in January.

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My daughter’s teaching stipend doesn’t show up on the 1098-T at all. Her tuition does and they do pay her health insurance but I’m not sure if that show up anywhere either. Every year they screw it up and bill it as OOS when she’s been instate since she graduated from undergrad (same school) and then they fix it but the 1098-T is still screwed up and, honestly, in the end we just don’t use it and she files her taxes using her own records (as we did for undergrad, which was always wrong because we kept all payments in the same tax year, and the school did the 1098-T by billing year). There really isn’t much of it that is taxable.

She is allowed to have an outside job and actually earns more at Starbucks than from teaching (which she doesn’t even do, as they switched her to a cataloging TA job). They also have tossed a few other one-time jobs at her like running a lecture during orientation week and manning a booth for campus tours. I have no idea how they classify those payments as she didn’t receive a W2 from the school (I think they are just thrown in with the TA stipend).

Last year I was looking for the stipend amount and couldn’t find it anywhere. So I went through her direct deposits and realized they weren’t included on the 1098 and there was no W2. So no income, no reportable scholarship amounts. It was really all a wash, she reported her Starbucks income and that was it. She did have some extra grants but she used those for summer tuition and travel to work on her thesis so again, a wash.

Right now she’s on a school/work trip, but the school is paying directly for the travel so we won’t have to worry about that!

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obtaining instate residency for tuition purposes, is extremely easy for grad students. Just get a new drivers license, register to vote get local bank account, re-register the car if any… It’s essentially automatic after one year.

If you use a national sw company like TurboTax or H&R Block, they’ll solve the dependency issue for you. (Hint, no longer dependent as she will have plenty of ‘income’ for the second half of the year. The school will issue a 1099 or W2, depending on how they report). The sw will also solve for any tax credits that she is eligible for.

And no, this is not complicated at all. Quite common, in fact. Students graduate from college every May/June and move to another state to start a job. And being a grad student is like a full time job. The only difference is that her tuition remission is tax-free, as are some other required fees; the Room & Board part of her stipend/fellowship is taxable income to her.

Here’s a decent explanation.

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Not automatic as you do have to keep track of physical presence and be prepared to show receipts (e.g. credit card or bank statements showing physical card transactions) outside of term time:

“During the 366-day period, you can be absent from California for a total of six weeks. If you exceed six weeks of absence, a resident classification will not be granted.
If you are a continuing graduate student, the Residence Affairs Unit will require documentation to verify your date of arrival in California and request evidence of your presence in California during summer and holiday breaks (if needed).”

Not correct if this is a true scholarship, OP says the school issues a 1098-T, presumably because there is no work obligation associated with the stipend. Scholarships don’t count as earned income for the purposes of dependency and are excluded from the 50% support calculation.

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Fully-funded includes a stipend for room and board and that is definitely taxable income. A school can report it in several ways.

btw: you forgot to mention: "If you are required to conduct research, intern, or be employed outside of California, this will not count toward the six-week period of absence. "

Now, does that mean you can’t go ‘home’ for the summer to lounge, yes. But then I don’t know of any PhD students that have that luxury. Seriously, just not difficult for a PhD student.

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I’m not suggesting it isn’t taxable income. The question for dependency purposes (and therefore for whether the kiddie tax rate applies) is whether it is earned income (not the special category designed “SCH” on your tax return that allows you to count scholarships for the purposes of determining your standard deduction).

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I’m not worried about the residency. The school has given her a list of things to do and says they will grant resident status if she does those things. And if for some reason they don’t, tuition doesn’t come out of our pocket so I assume the school would just have to keep paying the out of state fee on her behalf.

It’s more the dependency and support issues I’m worried about - and specifically the kiddie tax. If she were moving to start a job that was paying her with a W2 there would be no issues – that’s straightforward. But since her only source of income is reported as a scholarship refund on a 1098-T, that complicates things. Without that W2 or 1099, it seems her stipend will be considered unearned income and thus taxed at our tax rate even though she is no longer our dependent and is living across the country. That doesn’t seem right to me, but she is not allowed to earn outside income in order to meet the “more than 1/2 of your support must be earned income” test (not that she’d have time for another job anyway - the grad program is a full time commitment). The document that CMA22 linked to above seems to indicate that in some cases (specifically athletic scholarships, where the scholarship is linked to a requirement to participate on an athletic team) that sort of scholarship income might be considered “earned income” even without the W2…that would be nice if it applied in this case. Not sure if it does - she is required to do year-round full-time lab research as part of the program but I’m not sure if that counts.

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Wasn’t asked and may not be relevant here - but be aware that the “Dependent” status on the parents’ tax return is separate/distinct from being an “Independent Student” for purposes of federal financial aid.

My daughter will be a dependent on our tax return for years to come, BUT, grad students are automatically considered “Independent Students” for financial aid purpose (regardless of her not being 24).

The result: The moment she started grad school, she suddenly became eligible for financial aid (e.g., paid lab assistant, paid TA position) because grad students do not need to provide parents financial information in the FAFSA. Then, when the university’s FA package comes in, you just don’t use the “loan” offers and/or appeal to the FA office, if they can substitute with work-study.

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This is a confusing area but you seem to have a handle on it and you’ve received good advice from @Twoin18 .

Just adding a few thoughts:

When tax time comes, keep in mind that taxable scholarships are treated as earned income for the narrow purpose of calculating the standard deduction. Not for dependency status, as you already know. Folks sometimes miss this nuance.

Be aware that kiddie tax rules changed in 2019, reverting back to pre-tcja rates. Some of the links shared above reference blog posts that refer to the outdated estate and trust tax rates.

I can’t remember the specifics but my general memory is that tax software like TurboTax can deal with these complicated situations but does not necessarily do so without the user being aware of how things need to be reported, and figuring out how to make the software do this correctly. So it is good that you’re understanding the nuances.

I’m not a tax lawyer but iirc the fact that research or lab duties are required as a condition for receiving a stipend does not affect whether that income is earned or unearned. Usually in these cases the university treats those requirements as part of the academic/educational program and not as payment for services or work. To treat it as earned income rather than a scholarship would impose a different set of requirements on the university. Of course, if treated as W2 or 1099 income, different story.

On the health insurance, you need to work with both insurance companies to coordinate coverage. One will be treated as primary and one as secondary. I would do this soon if you have overlapping coverage as this can cause hassle down the road, including companies clawing back reimbursement and pointing fingers at each other over who is primary and who is secondary.

You might try bogleheads.org for additional input. Pretty savvy crowd over there on tax rules generally, and CPAs chime in also.