@blossom I agree I have seen some bad advice too, but normally it was related to financial aid and taxes, which is why I stressed using a reputable tax software, and figuring it both ways. Since financial aid is not an issue, obviously, she would do fine with software. My post was not a blanket endorsement of all advice given regarding taxes, just this particular situation. I agree with you, when it comes to estates,property, things of that nature, yes, it is probably best to seek out professional advice.
Party- we agree! I love my turbotax (but my finances don’t appear to be as complex as the OP’s!)
To get $50k in INCOME from investments a year, you need a lot of investments. The OP was just using that as an example, so I don’t think his child actually receives that much, but we’re only talking about a $2500 credit that some people don’t qualify for anyway (including OP). The whole point of the kiddie tax is to keep wealthy people from moving their earning to their children’s tax rate, so would it make sense that the tax credit that the parents didn’t qualify for could be easily shifted to the unearned income of the child? Tax rules don’t always make sense, but the IRS isn’t going to make it easy for the child to take the credit when the parent can’t.
@blossom and @twoinanddone $50K of income could have been mostly generated by capital gains from selling previously gifted stock. While I would agree this child appears to be well set up for educational expenses, we don’t know if all of her stock was sold year 1 or if they only sold enough to cover Y1 expenses. In any case, there is no presumption whatsoever that this kid is worth “millions” or even hundreds of thousands. If she was gifted stock with a low cost basis, it’s easy to assume that 90% or more of the sale price could be capital gains income. My S has this exact situation where we have benefitted from one of our grandparents gifting stock to great grandchildren - he has some ridiculous stuff like Microsoft from the 80’s, and AT&T from the 60’s, but when it’s sold, pretty much the entire sales price is taxable capital gains.
I would tend to guess this more the case, b/c if the kids are actually worth millions, the parents would be worth even more, and they would definitely not be using TurboTax.
If my software is correct, the kid can take this credit. It doesn’t affect the kiddie tax, though.
H&R Block : tried them several years ago. My husband ended up explaining them the forms. Total waste of time and money.
Last year we hired a recommended tax professional. Complex tax return: inheritance, small business, consulting, etc. Interestingly, tax professional got the very same result as we did ourselves, with Turbo Tax.
I don’t understand the mantra of “hire the professional”.
Next to the mantra “hire the professional”.
Overtime we had several immigration attorneys. All of them knew less about immigration than we did. Actually, immigration forums provided more relevant information than the attorneys. In the end, we did all immigration paperwork ourselves, with the advice of internet forums. It was not the question of money. Internet forums were more knowledgeable and accurate.
My company employs several expert immigration attorneys for most cases and we retain top immigration counsel around the world for a particularly complicated case (and there are some.) If I were a highly paid professional seeking to relocate overseas I would not be relying on an online forum for advice. And Turbotax works great for me- I have no need for outside tax advice, but then again, my 17 year old kid wasn’t getting 50K per year in unearned income.
In case this is OP was looking for, I have just had to wade through the nuances of the Kiddie Tax for 2014 for my D.
Here’s what our CPA did:
(1) Determined that we are not entitled to File 8814 for our D because her unearned income did not consist solely of interest and dividend income
Form 8814: http://www.irs.gov/pub/irs-pdf/f8814.pdf
(2) As a result of (1), D was required to file her own Form 1040, attached to which was Form 8615 (Tax for Certain Children with Unearned Income)
http://www.irs.gov/pub/irs-pdf/f8615.pdf
Form 8615 was necessary because D met these requirements (in other words, she is subject to the Kiddie Tax).
http://www.irs.gov/taxtopics/tc553.html
(3) And because D does not provide 1/2 of her own support, she was not entitled to claim herself as an exemption on her Form 1040, even subject to the limitations of Form 8615.
In case there is an issue concerning the extent of “support,” here’s a discussion on that topic:
http://www.aicpa.org/publications/taxadviser/2010/august/pages/nichols_aug-2010.aspx
“Last year we hired a recommended tax professional. Complex tax return: inheritance, small business, consulting, etc. Interestingly, tax professional got the very same result as we did ourselves, with Turbo Tax.”
So what you are saying is the tax professional was correct, and came out with the same results you did using TurboTax, which was also correct. The tax professional can’t be more than correct, just correct. If you are saying the professional cost too much money, that is different and only you can decide if the time and money is worth it.
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Agreed. However, it is really possible to do it all through TurboTax.
From personal experience, we could file all paperwork better than immigration attorneys, employed by companies. They were ridiculously slow and rigid.
Our attorneys don’t get paid to file papers. They get paid to figure out how to transfer a valued employee who lives in country A to work in country B with an eye towards eventual citizenship for the entire family (if that’s what the employee wants) or to allow the spouse to be able to work in the interim. Or to get the appropriate visas for a team of employees who are being transferred for a finite period of time, many of whom have prior immigration issues or come from a wide range of countries with varied citizenship requirements.
And how many immigration attorneys did your company provide for you that you needed plural?
This is a young adult attending college – there is no law that says that parents are required to continue to support their children from age 18-24 while their kids attend college, though the tax code recognizes that many do.
However, these parents seem to have provided for their child well enough that the child may not need their continuing financial support – I say, good for them!
IRS doesn’t care whether or not parents decide to support kids in that age range – they leave it up to families to decide what is best. Of course they also expect taxpayers to be honest: if the parent wants the child to be deemed independent for tax purposes, then that child should be also be paying 50%+ of her own expenses out her own money.
But the kid is over 18. Parents have every right to “shift” financial responsibilities, along with tax benefits, over to the child.
@blossom, I’m sorry you take offense at my asking for tax advice from this forum, but frankly, it’s turned out a lot better than I ever expected. There are certainly many parents who have gone through it before me and are willing to share their wisdom. And some of the responses certainly corrected my misunderstanding of the tax code so I have no regrets about asking. That of course doesn’t mean I’m not going to do my own homework. I am a lawyer (but not a tax lawyer) so I know enough to ask the right questions and to know where some things sound like they need more due diligence. All the nuances about earned income are things that even CPAs may not be on top of, since they don’t see a lot of child returns with unearned child income, where as, a crowd sourced answer may hit several people who know what I’m talking about from personal experience.
As for my D’s situation, she’s no millionaire, she just has an accumulated UTMA education account that has enough to pay for her college tuition. That money came from grandparent and parental gifts, and a very small amount in her own savings of babysitting and other earned income. But I did make a mistake in saying that she had $50,000+ in income. She had more than $50,000 in capital gains, so her adjusted income was substantially less than that. After all that, I’m still a little unclear on whether I provide 50% of her support or not. I pay for everything outside of her college tuition, i.e., room, board, books, health insurance, clothing, spending money. If her tuition was $46,000 (and her account paid all of that except for $3500 she received as an NMS and another merit scholarship) does it mean that as long as I was not out-of-pocket more than 46,000, she could qualify as a non-dependent and receive ATOC to offset her income taxes?
If the tuition was paid from a tax-sheltered educational savings account (like a 529)- then it would not be eligible for the AOTC . However, from what you say, it seems to be coming from a UTMA account – so I think it would still qualify. The AOTC is her money, not yours – that’s the whole point of those accounts. So yes, if she is paying $42K from her AOTC account and you are paying some amount less than that for room, board, spending money, etc – then she would be independent. (It would be illegal for you to try to take that UTMA money back – once it goes into her account, it’s hers, forever).
On the other hand, given your financial status, it’s conceivable that you have been generous enough with all of those extra expenses that you are still paying more that 50%. For example, if your idea of “spending money” is $1500 a month, and “clothing” means designer clothes… your kid would be living in comfort, and still a “dependent.”
So go back and check your records and put it all on a spreadsheet – what you paid, what she paid.
Thanks @calmom, and yes, I can confirm that the UTMA is legally and irretrievably my D’s money, not mine. I also took the IRS questionnaire linked above, and it also said that she would qualify for the AOTC as a non-refundable credit (n.b., her age of 18 was a factor); also said that she might qualify for a lifetime learning credit. Another thing to look into!
I have to say, I feel a little bad about taking all these credits, as neither my D nor I really need it. I would have been perfectly happy if the IRS just let me put my D’s unearned income on my own tax return and pay her taxes at my rate, but no, they don’t let you do that. So if the govt is going to make me jump through the hoops and file tax returns for each of my children, I’m going to get what’s due to them whether they need it or not. I think it would be sensible for the government to say that parents of children up to the age of 24 who are full time students can continue to have all their taxes reported on their parents’ return until they leave school or they have earned income exceeding $XX amount.
@spayurpets – I am sure that with your income and your daughter’s income, you are paying your fair share of taxes! If your daughter is paying her college tuition out of her savings – then by all means she should get the credit – it’s her money going to tuition, and the full credit is only a small fraction of what she is actually paying. As we’ve all figured out together – it’s not as if IRS is going to send her a check in the mail – the credit will just end up reducing the amount of the bill she owes IRS.
Last year we claimed my DS (like we always do). When I did his taxes I accidently put down that he was his own dependent. My preparer called a couple of months later and said my return was denied because I claimed DS as a dependent (correctly, since we supply 100% of his money). He re-filed for us without DS as a dependent and I owed 4 figures- six counting the pennies 
PS- hopefully we can refile DS’s return without him claiming himself as a dependent, and then refile ours 
from what we have been told, it isn’t as easy as just saying they are independent.
Our ds next yr will have not received much in support from us. (Mainly just health insurance through my husband’s employer. ) He won’t have lived at home. He is doing paid research this summer. He attends school on full scholarship.
We don’t qualify for the AOTC since all of his expenses are covered by scholarship $$. We can’t say he is independent bc scholarships cannot be counted toward independent support. So we aren’t paying it, but he can’t claim it. AND the scholarship doesn’t count as earned income, but qualifies as unearned income at the kiddie tax rate (which doubles what he has to pay in taxes.)
I imagine if he claimed himself as independent (which we would gladly do to prevent him from being taxed at such a high rate), I suspect he would be opening himself to an audit bc he couldn’t demonstrate providing 50% of his support without including the scholarship even though we can demonstrate that we are not providing for him financially. (Completely circular)
If I am misunderstanding, I would love someone to explain to me that everything we have been told is wrong bc that would be totally awesome and definitely save $$.