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Does my 25 year-old sister receiving scholarships/grants no longer qualify as a dependent? How much is considered income?

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February 10, 2020
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My sister is a 25-year-old full-time graduate student earning no income. She has taken out student loans under her name (parents didn’t cosign) and has received scholarships/grants. On form 1098-T, she has $55,673 in box 1 for qualified education expenses and $41,500 in Box 5 for scholarships and grants. Of the box 5 amount, $2,500 was for a cost of living stipend, which I believe would be the only amount considered income reported on line 1 of the Form 1040. Using TurboTax, she is also getting a $4,000 deduction for tuition and fees. Although her income does not exceed the filing requirement of $12,200, she may still choose to file her tax return to complete the FAFSA.

Could you please help confirm the following?

1. Is she considered providing half her own support since she took the student loans under her name without my parents co-signing? Because of this and because she is over age 24 I believe she should not be considered a dependent on my parents’ tax return and should file her own return.

2. The only income amount is $2,500, since the remaining scholarships/grants were not specifically awarded towards non-qualified expenses. Is it assumed the remaining box 5 amount goes towards paying for qualified expenses?

3. Per the IRS Pub 970, she can’t deduct qualified education expenses that have been paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Because the box 1 amount exceeded box 5, is it appropriate to take the $4,000 deduction?

Best answer by Hal_Al

Does my 25 year-old sister receiving scholarships/grants no longer qualify as a dependent? How much is considered income?

Your sister no longer qualifies to be a dependent.

There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

The fact that she is over age 23 means she can no longer be a QC. To be anybody's dependent (you or your parents) she must meet the Qualifying Relative (QR) rules**.

The support test is no longer whether she provided more than half her own support (that's the support test for a QC). Now the support test is did the taxpayer, who wants to claim her, provide more than half her support. That's unlikely is she had $41K of scholarships plus student loans. Nobody can claim her as a dependent.

Since she can claim her self, it would be appropriate to take the $4,000 deduction. Or better yet, claim $14,173 ($55,673 - $41,5000) for the Lifetime Learning Credit. But those are non refundable credits/deductions. Since she doesn't have enough income to have a tax liability, or even file, those will do her no good.

**A person can still be a Qualifying relative dependent, if not a Qualifying Child, if he meets the 6 tests for claiming a dependent:

Closely Related OR live with the taxpayer ALL year (not even one night at the non-custodial parent’s home).
His/her gross taxable income for the year must be less than $4200 ($4150 in 2018)
The taxpayer must have provided more than 1/2 his support

In either case:

He must be a US citizen or resident of the US, Canada or Mexico
He must not file a joint return with his spouse or be claiming a dependent of his own
He must not be the qualifying child of another taxpayer

Hal_AlAnswer

Employee

Does my 25 year-old sister receiving scholarships/grants no longer qualify as a dependent? How much is considered income?

Your sister no longer qualifies to be a dependent.

There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

The fact that she is over age 23 means she can no longer be a QC. To be anybody's dependent (you or your parents) she must meet the Qualifying Relative (QR) rules**.

The support test is no longer whether she provided more than half her own support (that's the support test for a QC). Now the support test is did the taxpayer, who wants to claim her, provide more than half her support. That's unlikely is she had $41K of scholarships plus student loans. Nobody can claim her as a dependent.

Since she can claim her self, it would be appropriate to take the $4,000 deduction. Or better yet, claim $14,173 ($55,673 - $41,5000) for the Lifetime Learning Credit. But those are non refundable credits/deductions. Since she doesn't have enough income to have a tax liability, or even file, those will do her no good.

**A person can still be a Qualifying relative dependent, if not a Qualifying Child, if he meets the 6 tests for claiming a dependent:

Closely Related OR live with the taxpayer ALL year (not even one night at the non-custodial parent’s home).
His/her gross taxable income for the year must be less than $4200 ($4150 in 2018)
The taxpayer must have provided more than 1/2 his support

In either case:

He must be a US citizen or resident of the US, Canada or Mexico
He must not file a joint return with his spouse or be claiming a dependent of his own
He must not be the qualifying child of another taxpayer

U

uc8pwlaAuthor

Thank you! To clarify, I read that if my parents co-signed the student loans that would mean they provided half of her support, otherwise if she took on the loans herself that would mean she provided her own support. Is that correct?

Also, I believe her income would be the $2,500 scholarships that were for the cost of living stipend and taking the $4,000 deduction would result in a zero tax liability. Overall, she wouldn't have a filing requirement since it's her income is below the $12,200 standard deduction amount but would there be any reason for her to file anyway? She took a year off of school the year prior and had a job where she had a filing requirement in 2018. For that reason or any other reason would she need to file now?

Hal_Al

Employee

That is correct, the co-signed loan money is considered as support coming from the parent.

You are also correct that If that $2500 scholarship is her only income, she does not need to file because it is less than the $12,200 filing requirement.

Since her income was less than $4200 ( that $2500 scholarship is her only income), she also meets the income test for being her parents dependent.

But there's still the question of the $41K of scholarships in the support test. Your parents would have to have provided more than that, to claim her.