I’ve filed FAFSA and CSS for S who is a HS senior, D is a sophomore in college. In order to save some on taxes I’m not claiming her as a dependent so she can use the tuition credit. I don’t think this will change any of my answers on either FAFSA or Profile so I’m not planning on changing them and the IRS retrieval tool will pick this up, but I was wondering if anyone knew if this was the case.
Your family tax filing status has nothing to do with financial aid filing status.
How does not claiming her on taxes change the tuition tax credit thing? Does that mean that your income is too high to get the tax credit?
If you don’t claim her even though you could, she still doesn’t get her exemption. From the line 5 instructions on the back of the 1040EZ:
Using the worksheet results in the filer not getting the exemption.
There is a provision that my wife and I don’t have to claim her as a dependent even though we are entitled to do so. We cannot claim the tuition credit due to it being phased out at our income level. She does not get the exemption, but by not being claimed on mine she can apply the tuition credit.
Did your daughter actually pay the qualified expenses being used for the credit? A filer can only use expenses paid by themselves or a dependent for the AOTC. Also, if she’s under 24 it’s unlikely she qualifies for the refundable part of the AOTC. Page 20 of Pub 970:
Are you sure about this? I thought that expenses paid by others, if paid directly to the school, were treated as if paid by the student.
She makes enough money to file taxes? I would think the tuition credit would be not applicable if the student doesn’t make enough money to pay that much in taxes.
At her age, someone has to claim her as a dependent, if she is under 24.
A Turbotax blog addresses this (can’t post link just search): who-should-take-educational-tax-breaks-parents-or-students/
No, nobody “has to” claim her as a dependent. Where did you get this idea? But if somebody can and doesn’t, she can’t take her own exemption.
No they don’t. There are many under 24 year olds who are not claimed as dependents on anyone else’s tax returns.
OK, I see this on page 10 of Pub 970 but it doesn’t seem to me to apply to the case of the daughter not being claimed.
Third party payments are treated as being paid by the filer claiming the dependent student. The daughter wouldn’t be a dependent on her own return.
In general, I think the rules are set up to not make it worth it for a family that exceeds the income level for the AOTC to do what the OP is trying to do. But that’s just my opinion and I’m not a tax pro so the note could be interpreted differently by someone else I suppose and perhaps there is guidance on this if the OP is using a CPA.
ETA: MiddKidd, I’d be interested in your interpretation of that note.
Yes, she does pay taxes, mostly capital gains on money sold from her college money investments- so yes, “she” is paying for her tuition. The feds are taxing us both to death so I’m glad my CPA found a way to a least mitigate the damage in a legal fashion.
I think it would be a strange result if it was OK for a third party’s payments to be counted as made by the parent filer when claiming the AOTC for a dependent student, but not OK for those same payments to be counted as made by the student when the student is claiming the AOTC on his or her own behalf.
There is this paragraph on pg. 18 of pub. 970, which is under the topic “Who Can Claim a Dependent’s Expenses?”:
Expenses paid by others. Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student’s qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.
This wording seems to contemplate two distinct scenarios: 1) in the last sentence, an exemption is claimed for the student and the filer claiming the exemption is considered to have paid the expenses actually paid by a third party, and 2) in the previous sentence the student is treated as having paid the expenses actually paid by a third party, presumably because the student is not being claimed as a dependent by another filer and is claiming the credit on his or her own return.
Thanks for the additional text.
Check out the last part of the AOC chapter of Pub 970: http://www.irs.gov/publications/p970/ch02.html
(page 20, as someone mentioned above)
Your daughter will probably not be able to claim the refundable part of the credit ($1000), since most of her income is apparently UNearned income. Read further down on that page to see what constitutes “support”.
The OP has a CPA so this isn’t a DIY. I think another large benefit driving this may be avoiding the kiddie tax on the daughter’s capital gains. Between the two enough for the family to give up the exemption amount. Not a common situation.
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I don't think this will change any of my answers on either FAFSA or Profile so I'm not planning on changing them and the IRS retrieval tool will pick this up, but I was wondering if anyone knew if this was the case. << Both FAFSA and CSS Profile have questions about the number of exemptions and the amount of tax paid. You can correct FAFSA fields yourself before running the DRT. With Profile you will have to call schools to find out if they want it corrected.
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Not sure if a child can avoid the kiddie tax even if the parents don’t claim the child.
http://www.irs.gov/taxtopics/tc553.html
None of the conditions for filing Form 8615 include being claimed as a dependent.