Is your college student really your dependent?

By Melissa P. Lanigan (Aug, 2010)

Is your child a college student? Who provides over one-half of your college student's support? Are you still allowed to claim your college student as a dependent on your tax return? Who is allowed to claim the education credits? All of these questions should be answered to determine if you can properly claim your college student as a dependent on your tax return. This will also determine who will be eligible to claim any additional education credits or deductions.

What qualifies your child as a dependent?

If your child meets the following five tests, then you, the parents, may claim your qualifying child on your tax return for the dependency exemption:

  1. Relationship - the child must be the taxpayer's child, stepchild, foster child, sibling or stepsibling, or a descendant of any of them.
  2. Age - the child must be under age 19 or a full time student under age 24 at the end of the year.
  3. Residency - the child must live with the taxpayer for more than one-half of the year. The child is considered to live with the taxpayer while he or she is temporarily away from home. Temporary absences include illness, education, business, vacation, military service and other special circumstances.
  4. Support - the student cannot have provided more than one-half of his or her own totalsupport throughout the year.
  5. Joint Return - For tax years beginning after December 31, 2008, the child cannot have filed a joint return with their spouse unless it was filed to claim a refund.

What is Support?

Since college students often use many sources of funding to pay for college tuition, room and board, etc, the support test often raises some additional questions and concerns. What expenses are considered support? Support includes shelter, food, clothing, medical and dental care, education, gifts, transportation, personal expenses, entertainment and recreation.

Different sources of funding college tuition and room and board include savings from parents, student's personal savings, earnings from part-time jobs, student loans, gifts, scholarships, and funds from college savings plans, i.e. a 529 plan. The source of the funds will determine if the expenses are support provided by the student or the parent.

For instance, suppose a student obtains a loan, which he or she is obligated to repay it back at sometime in the future, to pay for his or her tuition, room and board, books and other supplies and equipment. This loan is considered support provided by the student. Similarly, the same concept applies to the parents. If the parents borrow money and are obligated to repay the funds, this is considered support provided by the parents. It is important to keep in mind only the amounts actually spent on tuition and other related college expenses are considered support.

Parents can also apply the amount of lodging and other household expenses attributable to the support of the college student's stay in between academic years, i.e. the summer months. The amount of support is calculated using the proportionately rule and then allocates the expenses per person. For instance, if a college student is home between the months of May and August and there are a total of 4 people living in the household, the proportionately rule would use 1/3 of the annual household expenses and then allocate the expenses by 25%.

Distributions from qualified tuition programs, also known as Sec. 529 plans or QTPs, and Coverdell education savings accounts also need to be calculated as potential student provided support contributions. In certain circumstances, these accounts are generally considered owned by the student.

It is important to remember that a loan, QTP, a Coverdell account, or support during the summer months may only be one or two pieces of the total support provided. All of the pieces of the total support must be considered. In order for the dependency exemption to remain with the parents, they must provide more the one-half of the students' total support.

Who can claim the Education Credits and Deductions?

A change in claiming the dependency exemption will also mean a change in who may claim any additional education credits or tuition deductions. Currently, there are several different benefits, of which one may be claimed on the appropriate tax return. Beside the personal exemption deduction, other benefits include the Hope scholarship credit, the American opportunity credit (a modification of the Hope credit), the lifetime learning credit, and the tuition and fees deduction. These credits can be claimed on Form 8863, Educational Credits. The tuition and fees deduction is claimed in Schedule A of Form 1040.

The Hope scholarship credit has a maximum credit of $1,800 per eligible student ($3,600 if the student is attending school in the Midwestern disaster area) and is only available in the first two years of college. The American opportunity credit has a maximum credit of $2,500 per eligible student and is available for the first four years of college. The lifetime learning credit has a maximum credit of $2,000. A student is eligible for the lifetime learning credit if the student is enrolled in one or more courses at a qualified education institution. The tuition and fees deduction has a maximum deduction of $4,000 and is eligible to students enrolled in a qualified education institution. All of the above credits and deductions are subject to varying phaseouts and limitations.

If the student qualifies as a dependent of the parents, the parents are allowed the above credits on their tax return. The same theory applies to the students, if the student provides more than one-half of his or her support; the student qualifies for the credits on his or her tax return. Care must be taken when applying these credits; the credits are not permitted to be claimed by more than one taxpayer in the same year.

So, can I claim my child on my tax return?

With the increased scrutiny from the IRS and other taxing jurisdictions, taxpayers now, more than ever, have to consider if their child is really a dependent for tax return purposes. This issue often requires extensive and careful planning and discussion. Since there are a variety of ways to fund college tuition, and the associated costs, it is important to remember that whoever provides more than one-half of the support most likely can claim the dependency exemption and any relevant education credits or deductions. Additionally, high income taxpayers have additional obstacles and require additional planning due to phaseouts of dependency exemptions and limitation on credits.

Please feel free to contact the tax professionals at Dermody, Burke & Brown to help guide you through this process.

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