As parents, we tend to assume our college children are still our dependents. We help support them financially, worry about them and support them emotionally, and keep their rooms ready for them when they come home for holidays and summer break. But to the IRS, a dependent means something very specific, and your college child may not be your “dependent” for tax purposes.
Qualifying as a dependent
In order to determine if your child is considered a dependent, consider these four tests:
- Relationship: Taxpayer’s son, daughter, stepchild, foster child placed by an authorized agency, or a descendant thereof (an adopted child is considered your son or daughter); taxpayer’s sibling, half-sibling, step-sibling, or descendant thereof
- Age: Under 19 at the end of the tax year and younger than the taxpayer or taxpayer’s spouse, if filing jointly, OR a full-time student for at least 5 months of the year as well as being under the age of 24 at the end of the year and younger than taxpayer or taxpayer’s spouse, if filing jointly; any age if permanently and totally disabled at any time during the year
- Residency: Dependent must have lived with the taxpayer for more than half the year (time spent temporarily away for school, illness, business, vacation, military service, or institutional care for disability are still considered living with the taxpayer)
- Support: Taxpayer provides more than half of the child’s support
Are you supporting your child?
It is the fourth test that is in question with regard to 529 distributions. Your college student may be making money, but if he or she is not using that money for self-support, it is not counted in the determination of dependency. But your 529 distributions, which can be made to you or to your student, are considered self-support if they are made to your student.
There are many tax benefits to carrying your college-age student as your dependent, even though you no longer receive the child tax credit after age 17. The number of dependents still affects your tax calculation. In addition, certain tax credits are available for any expenses you incur for your child’s education such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). However, these credits phase out for higher-income taxpayers, and must be deducted from the amount of 529 distribution that can be used, so the calculations can get tricky.
Should I continue to claim my child as a dependent?
If your income is below the threshold of these tax credits, you may want to continue to claim your child. In this case, you would have the 529 distributions made to you. This way, the IRS would consider you to be supporting your child. However, if you cannot take advantage of these credits due to higher income, the chances are that your child’s income is still low enough that he or she can. In such a case, it may be a wiser tax decision to have your child file separately, not as your dependent.
These are important financial decisions to make. Working with a qualified tax accountant, take time to calculate all your child’s support expenses and sources of support. Run the numbers for different scenarios. For instance, calculate your taxes and credits with your child as your dependent, then without your child as a dependent; calculate tax effects with you receiving the 529 distributions and with your child receiving the distributions. Based on the results of these scenarios, you may want to make some changes. However, because of the complexity of the tax code, each scenario changes multiple aspects of your tax calculation. Therefore be sure to do this with a qualified tax accountant. Also consider the effect on family dynamics. If the difference between the scenarios is small, you may want to keep your child as your dependent. This is something to discuss as a family.
If you are in or around the Willow Grove, PA area, please call us here at F.J. Koelle & Associates to see how we can help you determine what arrangement is best for your family. We’ve been helping families just like yours with their taxes for over 30 years.