Most parents are aware of the general rules for claiming their children as dependents, including the extended period allowed to full-time college students who are under the age of 24 (See Dependency Requirements). Besides establishing who is entitled to the student’s exemption, a child’s status as a dependent determines whether the child or the parents can claim the education tax credits and the tuition and fees deduction.
But what most parents don’t realize is that a college student who provides more than one-half of their own support during a tax year will be disqualified as the parents’ dependent. In fact, parents can no longer assume that their college students will remain their dependents until they graduate.
A college student’s support typically includes expenditures for food, clothing, shelter, tuition and fees, books, room and board, medical and dental care (including health insurance premiums, co-pays, deductibles and other out-of-pocket expenses), education, transportation (including an automobile) and other similar items. Whether a particular item is taken into account in the support test depends on the source of funds used to pay it. College students draw on many resources to pay for their education, including personal and family savings, gifts, part-time jobs, scholarships and student loans. As the percentage of funds from the student’s sources increases, parents risk losing the student as a dependent. To perform the support test, expenditures made from the student’s funds (including income and gifts) must be compared with the total expended from all sources.
In recent years, many parents began using Section 529 qualified tuition plans (QTP) as a tax-effective means by which to save for their child’s education. The tax implications of 529 plan distributions should be considered before making withdrawals from these accounts. In addition, today’s students are borrowing more money for college than any previous generation. Both student loans and QTPs directly impact the support test for a qualifying child.
Click here for a discussion of some typical student dependent support issues.
Planning Implications
Most college students will remain the parent’s dependents for the year they enter college since they lived at home for the first eight months while completing high school. Since there usually is still a significant level of parental support during the last year of high school, parents may be able to take a larger distribution from a QTP or Coverdell account without jeopardizing the student’s dependency status.
The college years are an opportunity to optimize the net tax position of the family unit. In many instances, high-income taxpayers may not derive any tax benefit from claiming their college student children due to the phase-outs of the dependency exemption, education tax deductions and credits, as well as effects of the alternative minimum tax. Some tax planning can improve the family’s overall tax position by manipulating the support test to shuffle the dependency exemption and higher education tax benefits among its members.
If you have any additional questions, please contact Victor C. Belgiorno at 516-861-3704 or .