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College student with 1098-T Claim as dependent or not?

Forum|Forum|5 years ago
May 25, 2020
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Daughter receives basically full tuition and most expenses paid by scholarships (so far). She just finished 2nd year. She volunteers and doesn't work. (no time...pre-med)
Is it better to claim her on our return, along with the scholarships/grants or have her file her own return?

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Best answer by Hal_Al

It does not matter what "is better". If she qualifies as your dependent*, she is not allowed to claim herself. So, you should continue to claim her as your dependent.

Even though she is your dependent, you do not claim any of her scholarship on your return. Taxable scholarship, if any, goes on the student's return, regardless of the student's dependency status. If her total taxable income, including any taxable scholarship, is less than $12,200, she does not need to file. Scholarships that pay for qualified expenses (tuition, fees, books and other curse materials) is tax free. Basically only scholarships that pay for room & board are taxable.

*

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
He did not provide more than 1/2 his own support. Scholarships are considered third party support and not as support provided by the student. Note that the support test is not how much support the parent provided.
He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12,200), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section. TT will check that box on form 1040.

Hal_AlAnswer

Employee

It does not matter what "is better". If she qualifies as your dependent*, she is not allowed to claim herself. So, you should continue to claim her as your dependent.

Even though she is your dependent, you do not claim any of her scholarship on your return. Taxable scholarship, if any, goes on the student's return, regardless of the student's dependency status. If her total taxable income, including any taxable scholarship, is less than $12,200, she does not need to file. Scholarships that pay for qualified expenses (tuition, fees, books and other curse materials) is tax free. Basically only scholarships that pay for room & board are taxable.

*

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
He did not provide more than 1/2 his own support. Scholarships are considered third party support and not as support provided by the student. Note that the support test is not how much support the parent provided.
He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12,200), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section. TT will check that box on form 1040.

Hal_Al

Employee

There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return, for the American Opportunity Credit