If you have been claiming a child as your dependent for U.S. federal income tax purposes every year, but this year the child becomes a college student, you may still be able to claim an exemption for that child. But you will need to take various different factors into consideration in making this determination.
Before determining whether your college student can be claimed as your dependent, you must first see if you meet some general tests in order to be able to claim an exemption for a dependent.
Ã¢Â?Â¢ If you yourself can be claimed as a dependent on someone else’s tax return, you cannot claim any dependents on your own tax return. And, if you are married filing a joint return and your spouse can be claimed as a dependent on someone else’s tax return you cannot claim any dependents on your joint return either.
Ã¢Â?Â¢ If your dependent is married and files a joint return, you cannot claim the dependent on your tax return, unless your dependent is filing a joint return only to claim a tax refund and there would be no tax liability for either your dependent or his or her spouse if they filed separate returns.
Ã¢Â?Â¢ Your dependent must have been a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico for some part of the tax year. You cannot claim an exemption for a dependent who is a nonresident alien for the entire year.
If the above tests are met, you must then determine if the child qualifies as your dependent under the “qualifying child” or “qualifying relative” criteria.
Normally you can claim an exemption on your U.S. federal income tax return for a “qualifying child”. To be your qualifying child, five tests must be met:
1. The child must be your son or daughter, stepchild, or eligible foster child. Other relationships that would qualify are if the child is your brother or sister, half brother or half sister, stepbrother or stepsister, or any of their descendants (your grandchildren or great grandchildren, for example).
2. The child must be under age 19 at the end of the year, or under age 24 if the child is a full-time student. So, your college student could meet this qualification. A child who is permanently and totally disabled is not subject to any age limit.
3. The child must have lived with you for more than half the year, except for temporary absences. Education qualifies as a temporary absence, so if your dependent is away at college during more than half the year, he or she could still qualify under this test.
4. The child must not have provided more than half of his or her own support for the year. Scholarships received by a full-time student are not taken into consideration as support provided by the student, so this would not disqualify the child as your dependent under the support test. But proceeds from a student loan would count as support provided by the student, if the loan is taken out in the student’s name. If the parents take out a Federal PLUS loan, for example, to pay college expenses, the proceeds from the loan are considered support provided by the parents.
5. If the child meets the tests as a qualifying child for more than one person, you must be the person entitled to claim the child as a dependent. This could be the case of a child of divorced or separated parents, or when there is a multiple support agreement.
You may be able to claim a dependent exemption for another person, who is not your child, under the “qualifying relative” rules. There are four tests to be met in order to claim a qualifying relative:
1. The person is not a “qualifying child”.
2. The person must be your relative or a member of your household. Relatives do not necessarily have to live in your household. A person who is not your relative must live in your home as a member of your household the entire year, except for temporary absences (such as while away at college).
3. The person’s gross income for the year must be less than a certain maximum amount ($3,200 for 2005). Note that there is not a gross income limit for a dependent you can claim as a “qualifying child”.
4. You must provide more than half the person’s total support for the year.
Did You Provide More Than Half the Student’s Support?
To determine whether you provided more than half the student’s support, you compare the amount you provided with the total amount of support the student received from all sources, including the student’s own income and resources. But the student’s own funds are not considered support unless they are actually spent for support. For example, if the student has savings, or works part time and earns wages, but does not use these funds to pay for college or other expenses, those amounts are not considered support provided by the student. And, as mentioned above, scholarships the student receives are not considered support provided by the student. But any amount of the student’s savings, proceeds from a loan that the student takes out, and any of the student’s income, both taxable and nontaxable, that the student uses to pay for his or her own expenses is considered support provided by the student.
As parents or another person who may be able to claim the college student as a dependent, you will have expenses that are:
Ã¢Â?Â¢ Directly related to the student, such as tuition and fees, lodging and meals at college, transportation, clothing, and other personal expenses, and
Ã¢Â?Â¢ A portion of your household expenses. To determine how much of your overall household expenses are considered support provided to the college student, you total up all your household expenses such as rent or the fair rental value if you own the home, food, utilities, maintenance and repairs, taxes and insurance, and divide this total by the number of persons who lived in your household. The proportionate individual share is the amount of your household expenses that are considered support provided to the student.
There is a “Worksheet for Determining Support” in Internal Revenue Service (IRS) Publication 501, Exemptions, Standard Deduction, and Filing Information, that will help you determine whether you meet the support test in order to be able to claim the college student either as your “qualifying child”, or “qualifying relative”.
When the College Student Files a Tax Return
There are certain cases in which a college student must file a tax return if someone else claims the student as a dependent. This generally depends on the amount of the student’s own income. In other cases, the student may not be required to file a return, but it may be advantageous to do so. The fact that the student files a return does not necessarily mean that the parents or someone else cannot claim the student as a dependent.
When the Student Must File a Return
If the student’s parents or someone else can claim the student as a dependent, the student may have to file a tax return if his or her own income is above certain limits. These limits are based on whether the student is single or married, and are defined in terms of earned income, unearned income, and gross income. These dollar amount limits are subject to change and can be found in IRS publications.
For example, in 2005, if the student can be claimed as a dependent, is single, and has unearned income (dividends, interest, and other investment income) of over $800, the student must file a return. A return must also be filed if earned income (salaries and wages from part-time work, for example) are over $5,000. If the student has both earned and unearned income, the gross income limit is the larger of $800 or earned income (up to $4,750) plus $250. So under the gross income limit, if the student had $300 of unearned income, for example, and $750 of earned income, he or she would not have to file under either the unearned income or earned income tests, but would have to file under the gross income test because the total is $1,050 ($300 + $750), which is more than the larger of $800 or earned income of $750 plus $250 ($1,000).
If the student is married, the same rules as above apply in terms of earned, unearned, and gross income, but there is an additional requirement. If the student has $5 or more of gross income and his or her spouse files a separate return and itemizes deductions, the student must also file a separate return.
A student who is self-employed would also have to file a return if earnings from self-employment are $400 or more during the year. In this case, the student would owe self-employment tax (in addition to any federal income tax) and would have to file Schedule SE, Self-Employment Tax.
When the Student Files a Return in Order to Claim a Refund
If your college students works and earns income, it may be to his or her advantage to file an income tax return in order to get a refund. In this case, the student should file, even if the total gross income is below the limits for having to file. And the fact that the student files a return does not automatically disqualify you from claiming the student as a dependent. The student could not claim a personal exemption on his or her own tax return, and that may reduce the amount of the student’s refund. But the parents may be able to reduce their taxes by more than the student would gain by claiming his or her own exemption, so the family may come out ahead overall.
The tax benefits available for education should also be taken into consideration in planning how they can be best utilized. These include the Hope credit, the lifetime learning credit, the tuition and fees deduction, and the student loan interest deduction. If the student takes these benefits, they may reduce the student’s taxable income below zero, and will not generate a refund, so the comparative advantage will be lost. But if the parents, for example, claim any of these benefits for the dependent student, they may be able to reduce their taxes.
If the student files a Form 1040EZ and knows that the parents or other person qualified to claim the student are going to claim the dependent exemption, the student must check “Yes” on line 5 of Form 1040EZ and complete the worksheet on the back of the form.
Phase-out of Exemptions
There is a phase-out of your exemptions if your adjusted gross income (AGI) is above a certain maximum amount. The maximum amount that applies in your case depends on your filing status. This limit is subject to change each tax year, and the amounts can be found in Internal Revenue Service Publication 17 – Your Federal Income Tax for Individuals, in Publication 501 – Exemptions, Standard Deduction, and Filing Information, or in the instructions for Forms 1040, 1040A, and 1040EZ.
For returns filed for 2005, for example, the limits on AGI, according to filing status, are as follows:
Married filing separately $109,475
Head of household $182,450
Married filing jointly $218,950
Qualifying widow(er) $218,950
The amount you can claim for exemptions is reduced by 2% for each $2,500 or part of $2,500 ($1,250 if married filing separately) by which your adjusted gross income exceeds the maximum amount for your filing status.