Taxes for unearned income

Q. If my child has no earned income, but $50,000 in unearned income, can they claim themselves as independent at the age of 18?

A. No. Income does no matter for children under 19 or under 24 if a full time student. 

Q. What if his/her unearned income was used to pay for college? Would it make a difference If college expenses are higher than $50,000/year or less than $50,000/year?

A. Income doesn't matter, but what he spends the income on does matter.  If he provided more than half his own support, for the year, he cannot be your dependent (and can file as "independent").  Tuition is considered as a support expenditure. Over or under his income doesn't matter. You just have to do the calculation to see if he provided more than half his own support.  Money he takes from his own savings/investments to spend,  counts as his own support, regardless of whether it was "income" for the year. 

There are two types of dependents, "Qualifying Children"(QC) and Other ("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.

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

1. 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
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. 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 himself.

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.

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

The question you ask is frequently really about the education tax credit. 

Be advised that a student, under age 24, even if he doesn't qualify as a dependent,  is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working (earned income). She cannot be supporting herself on student loans & grants, investments, and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)

The criteria for being a non-dependent is whether they provided over 50% of their own support.  This includes shelter, food, clothing, utilities, medical, etc. 

If a parent or someone else paid for more than half of their living expenses, they did not support themselves. If they used unearned income or student loans to pay for most of their expenses, they did not support themselves. 

Click this link for more info on Did I Support Myself?

If they did not support themselves, the parents can claim them as their dependent, and they may qualify for an Education Credit if there were expenses over and above Scholarships/Grants received. 

If they did support themselves by the criteria given, then they may qualify for an Education Credit on their return. 

If they received a 1098-T, here's info on How to Enter a 1098-T in TurboTax.

Here's more info on Qualified Education Expenses you may find helpful. 

[Edited 4/8/2024 | 4:30 pm]