I was doing my taxes this year had this question come up, should I declare my college student child as a dependent? Hoping a tax specialist or CPA is on the thread to answer. The usual answer is that it is always better for the parents to claim the child as dependent because the tax deduction is worth more to the parent who is presumably in a higher tax bracket than the child. But here’s the dilemma for high income households: my income is too high (above $180k filing jointly) to qualify for any child tax credit or education credits or deductions, and my D has enough investment income from her college fund to have to file a tax return and to pay taxes. So the only tax benefit I get from declaring her a dependent is the $3950 tax exemption per child, and even that phases out at even higher incomes. Presumably, if I don’t claim her as a dependent, she gets the education tax credit, no? So the question is, in this situation, is it better overall for the parent to claim a child as a dependent and get the minor deductions off income or is it better for the child be independent and thereby take tax credits to offset the child’s investment income.
If she doesn’t supply at least half of her own support, she can’t take her own personal exemption and therefore can’t take the AOTC .
If your D is a full time student under the age of 24, she can only claim her own deduction if she provided over half of her own support. If she didn’t, then she can’t claim herself.
Should a high income family use a professional? Yes.
Here is my understanding based on my own situation.
If your income is high enough where your exemptions are phased out and you are itemizing, you really get no benefit that I can see for claiming a dependent. If you don’t claim the child as a dependent your dependent qualifies for the American Opportunity Tax Credit up to the amount of taxes that he/she would have otherwise owed.
We haven’t claimed D1 since she started college back in 2010. For 2010-2013, we didn’t claim her but we could have as she did not have her own support. There was no earned income in 2010, so she didn’t file for AOTC. For 2011-2013, she had summer jobs, so she was able to get a small AOTC credit. For 2014, where she graduated and started working from July-Dec, she earned enough money to pay more than half of her own support so she claimed her own exemption and got the full $2500 AOTC for 2014. During the first half of 2014 when she was still a senior, we were careful that her apartment rent would come out of her own money (we paid her credit card for food) that she had earned from previous summers. Our only other support was that she lived at home from graduation until Sept 1 until she moved into an apartment.
Couldn’t a high-income family gift the child $14,000 and let the child support herself, using her own earnings and college fund for the balance?
A high income family likely knows that the hassle of an audit (out of pocket costs, lost time, etc) far outweigh the potential tax savings you are talking about.
Get some professional advice- for god’s sake- from someone who has your last three years of tax returns in front of you, and has experience in this area.
Are you really going to take advice from a bunch of strangers on the internet??? Sheesh.
We have a professional do our taxes, but I fill out the planner, so I’m an expert…lol. We claim our college-aged children. but they also have earned income so we file returns for everyone. If you claim your kids as dependents, you can also deduct their medical expenses - premiums and out of pocket expenses…that adds up with accident prone kids and high deductibles.
Flat tax please…then anyone could do their own return. The only reason they won’t do it is because the ridiculously complex tax system benefits the 1%
You can gift all you want but for full AOTC the child must provide over half her own support from EARNED income, among other requirements.
Thanks for the responses, my mistake for not checking back until tonight for responses. I didn’t know about this 50% support rule. If you can count investment income, I think she could probably meet that test. Perhaps I’m revealing too much here but, say, she had $50,000 in investment income last year (but no earned income), wouldn’t that be enough to say that she pays half her own support? I think next year I’ll at least go through a dry run of filing her taxes without claiming her as a dependent and seeing if a tax software can tell me whether it would be better off having her as dependent or not. As it is, it’s a pain for her (and for me, because I fill out the forms) for her to file her taxes separately. If the government is going to force me to do that, I’m going to get the most out of it that I can.
Oops, just read @madison85’s response, so it might have to be “earned income” to qualify for AOTC education credits. But what about the other attributes of filing taxes for ones self, like the standard deduction, the personal exemption, your own (and not your parent’s) tax bracket. Do she qualify for those without earned income? It might still make sense for me to not claim her as a dependent if she can get that, even if the AOTC is off the table.
As for tax professionals, I’ve never believed in paying for tax advice; Turbotax is pretty good for covering everything I’ve needed up to now. The student tax stuff is a bit more complicated only because there’s a fork in the road here, and I have never been able to see down one of the roads before.
The income doesn’t have to be earned in order for the adult child to have independent status – it just has to be more than what you are providing for support. @madison85 was responding to my question about whether high asset parents can gift their children money and have that “gift” not count as support – but given your more recent post it sounds like your daughter has enough to support herself without any money from you.
There’s an questionnaire at http://www.irs.gov/uac/Am-I-Eligible-to-Claim-an-Education-Credit%3F you can use to determine AOTC eligibility. If your daughter is supporting herself from unearned income, then she can still get the credit, but it is not a refundable credit. That is, the credit can be used to reduce the taxes she owes, but it won’t give her a tax credit if she doesn’t owe anything. Is the investment income taxable? Theoretically the credit might zero out her tax liability. Her tax liability would also be substantially reduced once she can claim herself as an exemption.
You are very fortunate to be in this position and I think it’s a legitimate question to ask. To turn it around – why should you be obligated to provide financial support to your daughter when she has sufficient assets and income on her own? Of course as a financially well off parent, you may be happy to provide the support – but the point is, it sounds like it really isn’t necessary.
Hmmm. My kids don’t have enough earned income to be independent, and yet my tax software program (H&R Block) applied an education credit to their returns when I didn’t claim them as a dependent. It could be wrong, of course.
That’s only to get a refundable credit.
A summer job between junior and senior year can generate a pretty descent tax bill that can be fully offset by a dependent student who is not claimed by a parent. HR Block TaxCut has done that for her.
On the internet, nobody knows you are a dog.
This is a hilarious conversation. I also don’t pay for tax advice-- but I don’t elicit advice from strangers on the internet either. A kid with over 50K in investment/passive income and you want us to tell you how to file?
@spayurpets I dont think it was wrong to ask advice here. Typically, this group gives educated, well informed answers. Any tax software will tell you how to go. You can plug in the numbers by claiming her, then do it without claiming her, and see how it works out. 50k in investment income, would be no reason, to pay a tax professional a ton of money. It just doesnt rise to that level.
$50k in INCOME would mean millions in dividend paying investments in the child’s name. At what level would you justify hiring a tax professional?
Its 50k, its not a million dollars. As long as she is getting the correct tax forms from the custodian of the assets, yes she can use tax preparation software. It doesnt change my opinion because it 50k in income.
50K for a child. In dividends/interest/realized capital gains. Do the math to realize what the child’s net worth is- right now- to generate that level of income. Let’s assume that the parent’s net worth is more (parent or grandparent has gifted to those assets to the kid).
Party- I have found that the WORSE advice on CC is regarding taxes. I’ve seen well meaning parents on the financial aid section give advice on how to treat a bequest, or how to treat a life insurance policy or an annuity payment which might have the near- term impact of increasing (slightly) financial aid, but will have a HUGE negative impact financially down the road in terms of taxes, NPV, etc. Is it worth paying tens of thousands in taxes (or losing tens of thousands of dollars in appreciation) in a few years for the sake of an extra 2K today in financial aid?
There are parents who give advice regarding a dead parent and his/her assets with no regard to the laws which govern the distribution of property in the state where the deceased lived. (hint- first come first served is not how probate works). And people who give terrible advice regarding Non-custodial parents and their financial complications.