Well @Mom2aphysicsgeek , if you’re not paying for his support and he’s not paying for his own support, who’s paying? IMO, the IRS is not going to audit this; they have much bigger fish to fry than a twenty year old claiming a 2500 dollar education credit. If you answer honestly that you are not providing any support, I don’t see how you are really putting you or him at risk of an audit. I think the only way you ever get “caught” on this is if you do something like what TV4caster said he did above–claim the child as a dependent and the child’s return claims that he’s not a dependent–the computer catches the conflict in those returns and spits them back.
@spayurpets I wasn’t thinking the issue would be with claiming any tax credit. I was thinking more in terms of him being a completely different tax bracket and being taxed at his rate vs ours. Since he was a freshman this yr, we did provide over 50% of his expenses since he lived at home until Aug. But, when we file next yr, we won’t have. The difference in taxes between kiddie tax at our rate vs. unearned income at his rate is significant. We have been told we shouldn’t go that route though. Now I’m more confused than ever. (We even had to send in quarterly taxes, but if he could claim himself and be taxed at his rate, I don’t think he would need to.)
Here’s the IRS “Worksheet for Determining Support”:
http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf
It looks like a hideous thing to fill out and I’m glad we don’t have to worry about the test for the time being. D is clearly 100% supported by us. Lucky girl! 
It is very much unfair that the scholarships don’t count as support but are taxed at the higher rate. What I would do to prove my daughter is on her own is remove all the scholarships from the equation, and all the things they cover (room, board, tuition). What is left? that is her cost, her support. Laundry, phone, insurance, transportation, food not covered, clothing. If I did this calculation and my child earned enough to pay these expenses, I’d certainly let her be independent for tax purposes.
He didn’t get there by paying for stuff needlessly, you guys. 
@Mom2aphysicsgeek – the OP’s daughter isn’t relying on money from a scholarship. She is paying for her education out of a bank account in her name – OP said it is a UTMA account, not a 529. So bottom line, the kid is using her own money to pay roughly $43K in tuition. Let’s say the OP also contributed $30K toward support -room & board, clothing, incidentals. That would extremely generous. But it would be less than half when you factor in the $43K that came from the kid’s bank account, tied to the kid’s social security number.
It’s lovely that the kid has such a large account and it may very well be that all of the assets in that account come from family gifts over the years… but it’s still the kid’s account. Maybe the kid had a choice of going to a private school with $46K annual tuition or the local state U for $12K/year. Maybe the parents decided to stay out of the money discussion and simply tell the kid: “It’s your money. You can save it, maybe use it to pay for grad school or for a down payment for a house later on or even to start your own business – or you can spend it on tuition. Your choice.” - and the kid opted for the more expensive private school. That’s just a hypothetical scenario – but the point is, it is still coming from the kid’s pocket – so it counts as the kid’s share.
@Mom2aphysicsgeek there’s something missing to the story. How can you have both a DS who is receiving a full scholarship because of financial need but also parents with such high incomes that the kiddie tax is hitting DS? Those two things don’t usually happen. There also have to be some out-of-pocket education expenses of DS to get him the AOTC. Who goes to college and has everything covered by scholarship? I think you need to relook at those assumptions.
He doesn’t receive scholarships due to financial need. His scholarship money is 100% merit with no need associated with them. We were not able to claim the AOTC bc all expenses were covered. Our main issue is whether the scholarship money is taxed at our unearned income rate (which is the kiddie tax rate) or his (which cuts the amt of taxes due in 1/2.)
Haven’t read every post but want to add this tidbit. Even if a benefactor pays the tuition (which is excluded from gift tax reporting requirements if paid directly to the institution) the AOTC credit still goes to the child or to the child’s guardians if the child is still considered a dependent. This information is from our professional tax preparer.
This article seems to explain the AOTC and the related question of claiming a child as a dependent fairly clearly:
Correct me if I’m wrong, but I thought scholarships, even merit scholarships, are not taxable income. What am I missing here? Is it an employer scholarship or some unusual scholarship that counts as income? Or are you just talking about the portion of the scholarship that cover room and board (which may be taxable)? My D received two small merit scholarships, NMS and an employer grant, but I reported neither as income. Here’s the IRS discussion of scholarships. http://www.irs.gov/taxtopics/tc421.html
As to your question about whether your DS supports himself or not, I think you just need to subtract all the tuition from expenses and then run a simple spreadsheet to figure out whether you pay more than half or whether he pays more than half (excluding tuition). So if he had $6,000 in living expenses (housing, food, books, recreation, travel, car) and all you paid was $500 in food and $500 in allocated medical insurance and $500 in imputed rent for the summer, then he supports himself more than 50 %. Right? (Sorry if I sound uncertain, I’m just trying to work these things out for myself as well. I welcome people pointing out where I’m wrong.)
FYI, to those who are interested, I bit the bullet and removed my D as a dependent this year in my tax return and I’ll see how it works out. As far as I can tell, all I lost was a $4000 exemption for one child (as you may recall if you go back and read this thread, my income is too high to qualify for the child tax credit, the AOTC etc.). My D has yet to come home for spring break but when she does I intend to sit down with her and teach her how to file her taxes. I think with the AOTC, her own exemptions and deductions that she can take, and the lower tax bracket, she’ll come out far ahead than if she was included as my dependent, but we’ll see.
Also timely was this article in Yahoo!Finance about the relationship between AOTC and dependents. https://taxes.yahoo.com/post/139856191513/my-adult-son-still-lives-at-home-can-i-claim-him
@spayurpets, how do you figure that your D will have a lower tax bracket than you? If she has investment (unearned income) she could be subject to the kiddie tax (form 8615, net unearned income taxed at parent’s highest marginal rate).
My understanding is if you are eligible to claim your child as a dependent (support rules, etc), but choose not to, then the child cannot claim their own exemption.
Also I thought that a child doesn’t just have to earn more than half their support, they also have to spend the money on their support.
@TV4caster, you can amend your return and your son’s to correct it I believe.
Maybe I need to rewind here, since the original post was a year ago: My wife and I are in a high income bracket who up to now have included our two children on our joint tax return. There is very little tax benefit from this now because income limits make us not eligible for the child tax credit, the AOTC, and the personal exemption is being phased out. My D has a UTMA (funded by parental and grandparent gifts) which contains enough money to pay for her private college tuition, and I have structured it so her tuition comes out of the UTMA and the other support (room, board, books, clothing etc.) comes out of my pocket or a 529 account I set up. This is the first year I am separating her from my tax return and she is no longer going to be declared as my dependent.
To answer your specific inquiries, this is what I think: The kiddie tax should not apply to my D because she is now older than 18. So she should have her own tax bracket based on her own income and her own personal exemption. She is lucky enough to have more than enough investment income and capital gains to pay for tuition, and as I said, the tuition of roughly $46k per year is paid from her account, and we her parents pay less than that of her support. So there’s no question she does provide more than 50% of her own support. Based on these circumstances (older than 18, not a dependent, pays more than 50% of her own support) she should be eligible for the AOTC of $2500. I don’t know whether that $2500 is a credit or a refundable credit as other than a couple of thousand dollars in summer jobs and school jobs, most of her income is going to be unearned. (Maybe someone can help answer that questions for me!)
Oh, man, not me! (But then I’m in no danger of climbing out of the 15% bracket, so maybe I do need it…) Since I am not high income (clearly), I found myself in the unenviable position of not being able to claim my oldest. She earned too much/provided too much of her own support. I was more than happy to let her claim her own AOTC because I didn’t feel like gifting the government with it.
Even with my paltry income, I use a CPA because clergy taxes can get “weird.” I’ve tried replicating the CPA’s results with TurboTax. Never comes out the same. I say GIGO. I sometimes just don’t know what I can put in for deductions.
Spay- but your D’s support isn’t just tuition. Health insurance? Don’t you feed her when she’s home for the summer, pay her cellphone bill, etc? I’m not questioning your math- just the logic. Even though you can “prove” that she’s self funding her tuition, is that truly half of her overall “maintenance” for the year?
Yes, if she pays more for tuition than you pay for the rest of her costs then maybe she is not your dependent.
But it does not matter what you think about kiddie tax, they changed the rules and now includes college students as well.
Most students run into this because of “unearned income” from taxable scholarships (those that pay for room and board), your D has unearned income from investments. Hopefully the tax software will evaluate the need for form 8615 once you enter your D’s source of unearned income.
https://www.irs.gov/taxtopics/tc553.html
Note that it says for fulltime students over 19 using form 8615 applies if their earned income is less than half of their support.
If your D has only investment income she wouldn’t have earned income, only unearned.
@spayurpets we have not done our taxes yet, but our plan for this yr is to not claim our ds as a dependent. We have paid absolutely $0 toward his expenses. The only thing he has from us is health insurance, but we are on a family plan and 7 of our kids are on it. It would cost us the same amt if only 1 child was on it, so I am not sure how we even factor that expense ( and it would be less than50% anyway.) He worked a research project last summer, and earned $5000; he lived there, etc. The only time he was home was a couple weeks before his REU and Christmas break. His income from the research project paid more of his expenses than we did, so even though his scholarship paid for most of it, we didn’t spend anywhere close to $5000.