Parents make $100K.. Daughter Made $18K.. Is she dependent?

[Chowdahead]

I have a couple of clients who together make just over $100k a year combined. The daughter is 22 years old and goes to college full time but made just over $18K working a job at the college. She still lives at home and her parents help her pay for school.

Can she be still be considered a dependent having earned that much? I know she will take a hit on her refund but the American Opportunity Credit may prove to more valuable since she paid well over $11,000 for school last year.

My assumption that is that since the parents have a larger tax liability, the American Opportunity Credit will benefit them more than her. I have to compare. But I'd like to get some opinions on whether she could even be a dependent as it is, or need to file on her own.

[ljwalters]

You have to look at all the expenses for her and do the dependency worksheet. If it calculates out to parents paying more than half then Yes she can still be their dependent. Are there student loans and who is responsible. Does she have a car and is it in her name or the parents. auto insurance health insurance just don't miss any of the expenses and you will probably be able to prove parents paid half.

[Janitor Bob]

Don't forget things like fair rental value of home as an expense paid by parents. I have yet to find a young full-time college student who's parents are not contributing more than half of the kids support.....it's possible, but not likely.

Also...If you find that she is NOT a dependent on parent's return, make sure you CAREFULLY read the AOC rules for people under age 24.

I had one young lady who was completely on her own (did not live with or received any support from parents). Under age 24, full-time student, parent are living....etc....according to special rules for under age 24, she did NOT qualify for the refundable portion of the AOC...the best she could do was lower her tax to zero.

[NECPA in NEBRASKA]

Also, check to see if she saved her money or spent it on her support. I have some students that made a lot of money, but saved most of it and Mom and Dad almost completely supported them.

[David1980]

If the student is paying for their tuition with student loans at all be sure to include that as support provided by the student, when doing the worksheet.

[jklcpa]

I have one of these I just finished yesterday with almost the same scenario, parents income over 100K, 22 y.o. daughter graduated college in May 2012 and earned about $14K. Turns out like NECPA said, the daughter is saving for a house and saved almost everything she earned last year.

[Bart]

You have to look at all the expenses for her and do the dependency worksheet. If it calculates out to parents paying more than half then Yes she can still be their dependent. Are there student loans and who is responsible. Does she have a car and is it in her name or the parents. auto insurance health insurance just don't miss any of the expenses and you will probably be able to prove parents paid half.

Under age 24 and a full time student means if she qualifies as a dependent she does so as a qualifying child not a qualifying relative. As a qualifying child. I did not think the parents had to provide more than half her support. It was just that she could not provide more than half her own support. Is this correct?

[jklcpa]

Under age 24 and a full time student means if she qualifies as a dependent she does so as a qualifying child not a qualifying relative. As a qualifying child. I did not think the parents had to provide more than half her support. It was just that she could not provide more than half her own support. Is this correct?

Not correct. To be a qualifying child, in general:

1. must meet relationship test, AND

2. younger than you and either: under 19, or under 24 and a student, or any age totally & perm. disabled AND

3. did not provide over 1/2 their own support AND

4. Not filing joint (or only filing joint to get taxes w/h refunded) AND

5. lived with you more than 1/2 year.

[Bart]

Not correct. To be a qualifying child, in general:

1. must meet relationship test, AND

2. younger than you and either: under 19, or under 24 and a student, or any age totally & perm. disabled AND

3. did not provide over 1/2 their own support AND

4. Not filing joint (or only filing joint to get taxes w/h refunded) AND

5. lived with you more than 1/2 year.

Yes correct. #3 says did not provide over 1/2 their own support. Does not say parents had to provide over half of her support.

[Terry D EA]

Also regs say that the support test is not needed if they are a qualifying child and full time student. Support test comes into play with a qualifying relative.

[Lion EA]

No, there's a support test for a QC too, and it's #3 above. The QR support test is the one about providing more than half the support of a QR.

[Pacun]

Bart, you are correct... Let's say that that the child provided 49% of her own support, her boy friend provided 3 percent of her support, the parents provided 48% of her support, then the parents can claim her.

[grandmabee]

I have one that student made 14,000 and parents household income including SS was 41,000. had scholarship that paid for tuition and books.

student will have some taxable scholarship. student stayed at school all year long. stayed there summer and worked. paid for his own apt. plus utilites etc.

I don't think I can use housing cost at home because he didn't come home. Parents paid for auto insurance and gave some money when could.

I don't think they can claim the dependent.

[jainen]

>> I don't think I can use housing cost at home because he didn't come home<<

First of all, you can't use housing cost at all, only fair rental value. It's pretty easy to think a room in a nice home might go for $1000 a month. When you ignore the scholarship, that's well over half.

Second, a child does not have to EVER live there to be claimed as a dependent. He can be a qualifying relative, and his room still counts as support even if it's just storage (because everything counts as support).

Third, there's a longstanding ruling about the definition of "temporary absence." The relative moved to a nursing home (special circumstance, just like education is) but still remained a dependent for years. Rev. Rul 66-28 concludes, "The possibility or probability that death might intervene before the dependent returns to the taxpayer's household is not sufficient to make such absence permanent."

[grandmabee]

Ok, he paid for his rent all 12 months plus all utilities, all food. In my area there would be no way a room in the house would go for 1,000.

He paid more for his apt rent than what a room would rent for. I am trying to wrap myself around this that he didn't pay for more than half his support.

[Chowdahead]

Thanks for the responses. I am working on this tonight so I will see what I come up with.

[ATX High Fiver]

It appears to me that you are forced to determine, among other things, whether the student provides more than half their own support. Pub 17, for ease of authority, indicates on page 25, third column, bottom of page: "You can take one exemption for yourself unless you can be claimed as a dependent by another taxpayer. If another taxpayer is entitled to claim you as a dependent, you cannot take an exemption for yourself even if the other taxpayer does not actually claim you as a dependent." This is also highlighted on page 27, first column, top of page. And, it appears in other places in Pub 17. This tells me that "electing" to determine who gets the greater benefit (because of the education expenses, for example) does not exist although most tax preparers seem to ignore this provision of the tax code in preparing the tax returns for parents and children. If the IRS has facts to the contrary, when a student takes their own exemption when entitlement doesn't exist, a letter could be generated by the IRS disallowing the student's own personal exemption and any related educational expenses. Something to think about.

[Pacun]

It appears to me that you are forced to determine, among other things, whether the student provides more than half their own support. Pub 17, for ease of authority, indicates on page 25, third column, bottom of page: "You can take one exemption for yourself unless you can be claimed as a dependent by another taxpayer. If another taxpayer is entitled to claim you as a dependent, you cannot take an exemption for yourself even if the other taxpayer does not actually claim you as a dependent." This is also highlighted on page 27, first column, top of page. And, it appears in other places in Pub 17. This tells me that "electing" to determine who gets the greater benefit (because of the education expenses, for example) does not exist although most tax preparers seem to ignore this provision of the tax code in preparing the tax returns for parents and children. If the IRS has facts to the contrary, when a student takes their own exemption when entitlement doesn't exist, a letter could be generated by the IRS disallowing the student's own personal exemption and any related educational expenses. Something to think about.

We are not checking who will benefit more. We checking who is entitled to the exemption but using simple math. Remember that math will hold true no matter how you start. The rule is... if the child provided more than 50% for his/her own support, no one else can claim his exemption even if he refused to take it.

So we check, what the parents provided, if we reach a level that parents provided more than 50%, simple math tells us that the child COULD NOT have provided more than 50% of his her own support. that would mean the end of the conversation and ONLY the parents should claim the exemption. Pub 17 doesn't dictate how you apprach the issue.

[jainen]

>>math will hold true no matter how you start<<

I wish it were that simple, but numbers like any other facts start with assumptions. What fair rental value do you give the amenities of a parents' home that would never in reality be rented? Does the apartment mean the absence is not temporary? How do grants and loans fit into this?

No, the IRS Pubs do not "dictate;" they are not the law. But they are widely-accepted interpretations of the law, and unless you are in Tax Court it is very difficult to avoid the IRS position. On the other hand, it is difficult for the IRS to get around YOUR assumptions. So who would benefit most is often not very far from who should benefit.