Now I may not want to have my kids as dependents

[SecondCor521]

Now I may not want to have my kids as dependents (coronavirus tax credit in 2021)

OK, follow my logic here and please tell me where you see problems.

DS20 is in college in Oklahoma and will reside there all year. He has earned some money this year.

DD18 is in high school this spring and will go off to college this fall. She has also earned some money this year.

The stimulus checks go out to eligible individuals. Individuals who fall under section 151 of the tax code are not eligible. I'd like DS20 and DD18 to be eligible individuals and get $1200 on their 2020 tax returns. This means they must not be my qualifying child and must not be my qualifying relative as defined in section 152.

I assert they each are not my qualifying child because they don't meet the "principal place of abode" test. DS20 took his car to Oklahoma and will be attending school there all year (including summer). He does not have any intention of returning to my state at this point. DD18 lives at her Mom's house the vast majority of the time, and will be away at college starting in August.

It is more complicated to assert that they are not my qualifying relative. I'd like to rely on them failing the gross income test; that is, having gross income more than the exemption amount as defined in 151(d). A close reading of 151(d) for tax year 2020 seems to state that the exemption amount is $0, so gross income of $1 would qualify.

That "gross income of $1" part seems wrong, because according to my Tax-Aide 4012, they have to have gross income greater than $4200.

Thoughts?

 

[rodi]

I haven't dug into the weeds on this. I know my younger son is in a limbo of no stimulus... He's 17, and the child stimulus is for those under 17 (16 or less.) Older son (age 19) didn't have a job, but did have SS through May when he graduated HS... And has been at college, but is now home because college has gone to e-learning. I filed a return for him today - based on his SS income... but know that he probably doesn't qualify. Figured it was worth the <1hour to fill it out and file it, just in case he does qualify.

 

[SecondCor521]

Thanks, rodi. As for your older son, note that they took the language about the $2500 of qualifying income out of the bill earlier this week. As long as he didn't file as your dependent and had an AGI less than $75K, and a few other requirements, he very well might get a stimulus check for $1200.

Also, after rereading my OP, as usual I left out part of my thoughts. I'm certain DS20 and DD18 won't receive stimulus checks. My goal would be to see if they might qualify for the tax credit on their 2020 tax return.

 

[clobber]

I think you are barking up the wrong tree - but might be in the right forest. There are multiple things you have to look at when determining if a child is dependent or independent. While it is spelled out in IRS documents, there is a nice summary here.

And one of the big things is the "support" test. If you are paying 1/2+ of the money needed for them to live, then they are a dependent.

One of the interesting things is that it appears that 529 funds are considered a "completed gift" when you put the money in. Meaning, that when they use 529 funds it is considered their own money - which could qualify them as independent. I can't find any final rulings on this but here is one reference and here is a another. This can be helpful for AOTC as well.

 

[SecondCor521]

I think you are barking up the wrong tree - but might be in the right forest. There are multiple things you have to look at when determining if a child is dependent or independent. While it is spelled out in IRS documents, there is a nice summary here.

And one of the big things is the "support" test. If you are paying 1/2+ of the money needed for them to live, then they are a dependent.

One of the interesting things is that it appears that 529 funds are considered a "completed gift" when you put the money in. Meaning, that when they use 529 funds it is considered their own money - which could qualify them as independent. I can't find any final rulings on this but here is one reference and here is a another. This can be helpful for AOTC as well.

Thanks for the comments.

The several tests for qualifying child and qualifying dependents are "AND" tests - the person has to meet all of the criteria to qualify. Therefore, if they do not meet all of the criteria, then they do not qualify. So I disagree with your middle paragraph.

I'm aware that there are multiple criteria; I was attempting to leave that out of the conversation because in my particular case these two kids do meet all of the other criteria except the "primary place of abode" test for qualifying child and probably the "gross income" for qualifying dependent.

...

Actually, after thinking about this, I think they'll both have gross income of several thousand dollars. My strategy in general is to claim some of their grants and scholarships as taxable income (in order to get the full AOTC and to help drain their college accounts), which should - I'll have to check but believe this was the case for 2019 - count as gross income and put them over the limit, whether it's $1 or $4,250 or whatever.

 

[clobber]

Thanks for the comments.

The several tests for qualifying child and qualifying dependents are "AND" tests - the person has to meet all of the criteria to qualify. Therefore, if they do not meet all of the criteria, then they do not qualify. So I disagree with your middle paragraph.

Maybe - and I know Im not linking to the official IRS documentation. But being at school does not qualify as being away from home:

Residency - the child must live with the taxpayer for more than one-half of the year. The child is considered to live with the taxpayer while he or she is temporarily away from home. Temporary absences include illness, education, business, vacation, military service and other special circumstances.

 

[SecondCor521]

Maybe - and I know Im not linking to the official IRS documentation. But being at school does not qualify as being away from home:

Right. The law talks about "principal place of abode" for more than half the year. I won't bore everyone with all the details and my thoughts here. Suffice to say I'll have to look up how that is defined and see how it applies to DS20 and DD18. I think there are factors that would support both the view that they will share my principal place of abode, but there are also factors that support the view that they will not.

 

[clobber]

Yes, but it also says in IRS Pub 17

Temporary absences. A person is considered
to live with you as a member of your household
during periods of time when one of you, or both,
are temporarily absent due to special circumstances such as:
• Illness,
• Education,
• Business,
• Vacation,
• Military service, or
• Detention in a juvenile facility.

 

[SecondCor521]

Yes, but it also says in IRS Pub 17

Sure. Since you mentioned it, I'll update here with what I found.

The question is whether the absence due to school is temporary or permanent.

A google search led me to:

https://www.federalregister.gov/documents/2017/01/19/2017-01056/definition-of-dependent

In there it talks about one factor being whether the person intends to establish a new principal place of abode or not.

In the case of my son, I would argue that he does so intend. He's said as much (independent of, and before the CARES Act was written), will probably sleep in Oklahoma over 350 days this year, hasn't slept at my house this year, took his car with him, and explicitly said he considers himself to be living in Oklahoma and doesn't plan to return to my state, but rather move wherever his job is after graduation. It would probably be helpful if he changes his DL, car registration, voter registration, etc., but not clear if that would sway things one way or the other.

In the case of my daughter, she's probably on the other side of the coin. She lives with her Mom and will be heading off to an in-state university in another city in August. And her Mom will be moving elsewhere in the state probably this summer sometime, so there's an outside possibility that DD18 will live with me after Mom moves but before college starts. I don't know what DD18's intentions are for whether she intends to return to my home at any point in the future. She probably doesn't even know at this point.

Complicating this all is that their Mom and I went through a divorce in 2006, and that document awards me the tax benefits (dependency exemption and child tax credit at the time) for the kids. So I have that additional wrinkle to consider.

 

[SALTedOut]

Complicating this all is that their Mom and I went through a divorce in 2006, and that document awards me the tax benefits (dependency exemption and child tax credit at the time) for the kids. So I have that additional wrinkle to consider.

Found this post doing some research. I'd think that the divorce document assumes that you both qualify to claim the child as a dependent. My guess would be the tax law says if the child does not qualify to be your dependent then you can't take it and now your ex would have to determine if she qualifies. If she qualifies then the child would be her dependent. If she doesn't qualify then the child would be independent.

Just a thought.

 

[SecondCor521]

Found this post doing some research. I'd think that the divorce document assumes that you both qualify to claim the child as a dependent. My guess would be the tax law says if the child does not qualify to be your dependent then you can't take it and now your ex would have to determine if she qualifies. If she qualifies then the child would be her dependent. If she doesn't qualify then the child would be independent.

Just a thought.

Thanks. The divorce document, if anyone really cares, says that I get the dependency exemption. The child support amount were adjusted to compensate my ex for the value of that exemption. The general thinking here is that I was the higher earner, so the exemption would be more valuable if I took it rather than my ex. All well and good.

Without boring anyone with all of the details, since the complexity of figuring out which combination of dependency exemptions was better from a tax point of view, I decided to revisit my facts and circumstances and just follow where the flowchart led.

Due to COVID, DS20's plans changed. He withdrew and returned home in May, and never changed his car plates or anything. He is over 19 and will not meet the definition of student this year, so he will be independent.

DD18 moved in with me full time in early May when her Mom moved out of town. She will turn 19 in December but will be a full-time student this fall in college. So I'm thinking she will be a depended this year since I think I can count her as living with me from early May through the end of the year. She's a freshman so it's really impossible to say with certainty what her intentions are about principal place of abode at this point. I'd guess she'll return to live with me or her Mom next summer.

 

[kaneohe]

..........................

Due to COVID, DS20's plans changed. He withdrew and returned home in May, and never changed his car plates or anything. He is over 19 and will not meet the definition of student this year, so he will be independent.

.......................................

Will DS20 meet the following? If so DS20 could be your qualifying relative and still be dependent.:

"3. The person’s gross income for the year must be
less than $4,200.3
...........................

4. You must provide more than half of the person’s
total support for the year.4, 5

 

[SecondCor521]

Will DS20 meet the following? If so DS20 could be your qualifying relative and still be dependent.:

"3. The person’s gross income for the year must be
less than $4,200.3
...........................

4. You must provide more than half of the person’s
total support for the year.4, 5

Thanks for reminding me; for some reason I forgot about the qualifying relative thing. He's taking time off from school and working until his school decides to do in-person instruction (TBD but no sooner than spring 2021). Given his job, it's highly doubtful he will meet the gross income test, but I'll make a note to check on it later in the year.

 

[rodi]

Due to COVID, DS20's plans changed. He withdrew and returned home in May, and never changed his car plates or anything. He is over 19 and will not meet the definition of student this year, so he will be independent.

I'll have to pay close attention to this. Older son (19) did a semester of school but has decided to put school on hold while it's online. (Well, he wasn't motivated at school and online made it worse....) He does plan to take 1 class online, through the local community college. He's had a full time job now for 3-4 weeks and if he keeps working he'll make over $10k before the end of the year.

I still think it doesn't matter for covid relief unless they base it on 2020 filings... He had no earnings in 2019 and was a dependent.

 

[SecondCor521]

I'll have to pay close attention to this. Older son (19) did a semester of school but has decided to put school on hold while it's online. (Well, he wasn't motivated at school and online made it worse....) He does plan to take 1 class online, through the local community college. He's had a full time job now for 3-4 weeks and if he keeps working he'll make over $10k before the end of the year.

I still think it doesn't matter for covid relief unless they base it on 2020 filings... He had no earnings in 2019 and was a dependent.

Yup.

Three things for others following this thread:

1. What you thought your kid might be for 2020 may have changed due to the virus. I'd recommend revisiting your assumptions.

2. To be a student, which is part of the definition for dependent children, requires at least half-time for at least five months. In my DS20's case, he dropped his remaining spring classes on April 28th and won't be attending anywhere this fall, so he doesn't meet that test.

3. As far as covid relief, the way the CARES Act was written, the stimulus payments received over the past several months are actually advances on a 2020 tax credit. So if your kid didn't qualify based on their 2019 situation, they may qualify based on their 2020 situation. And if so, there'll be a place on their 2020 return to get that money next spring. My DS20 is in that situation.

 

[cathy63]

I'll have to pay close attention to this. Older son (19) did a semester of school but has decided to put school on hold while it's online. (Well, he wasn't motivated at school and online made it worse....) He does plan to take 1 class online, through the local community college. He's had a full time job now for 3-4 weeks and if he keeps working he'll make over $10k before the end of the year.

I still think it doesn't matter for covid relief unless they base it on 2020 filings... He had no earnings in 2019 and was a dependent.

If he attended the spring semester in 2020 and it covered parts of all the months between Jan and May inclusive, then he qualifies as a full-time student. The $4300 test (that's the 2020 number) is only for dependent relatives who are not full-time students.

Assuming he lives with you and is a full-time student, whether you can claim him as a dependent comes down to whether he provides more than half his own support or not. It sounds like he will earn enough that it could plausibly go either way depending on whether he saves some of his earnings or uses them to pay his own living expenses.

This is one of those times when it is a good idea to do his and your returns both ways to maximize the benefit to the entire family. If he's independent, then he will get the first $1200 stimulus round as part of his 2020 return, but you might lose some education credits and there could also be ACA premium credits to consider.

 

[SecondCor521]

If he attended the spring semester in 2020 and it covered parts of all the months between Jan and May inclusive, then he qualifies as a full-time student. The $4300 test (that's the 2020 number) is only for dependent relatives who are not full-time students.

Assuming he lives with you and is a full-time student, whether you can claim him as a dependent comes down to whether he provides more than half his own support or not. It sounds like he will earn enough that it could plausibly go either way depending on whether he saves some of his earnings or uses them to pay his own living expenses.

This is one of those times when it is a good idea to do his and your returns both ways to maximize the benefit to the entire family. If he's independent, then he will get the first $1200 stimulus round as part of his 2020 return, but you might lose some education credits and there could also be ACA premium credits to consider.

Emphasis added.

The way the rules are written, I'm fairly certain that a student who is not a dependent can claim the AOTC even if the parent paid the $4000 OOP. (See instructions for Form 8863.) I don't know if the LLC or other education benefits are written similarly.

I agree about the ACA premium credits point though. Since my DS20 is not my dependent this year, my family size will be reduced from 3 to 2, which will affect my ACA APTC. It'll be interesting to see how things turn out this year.

 

[rodi]

If he attended the spring semester in 2020 and it covered parts of all the months between Jan and May inclusive, then he qualifies as a full-time student. The $4300 test (that's the 2020 number) is only for dependent relatives who are not full-time students.

Assuming he lives with you and is a full-time student, whether you can claim him as a dependent comes down to whether he provides more than half his own support or not. It sounds like he will earn enough that it could plausibly go either way depending on whether he saves some of his earnings or uses them to pay his own living expenses.

This is one of those times when it is a good idea to do his and your returns both ways to maximize the benefit to the entire family. If he's independent, then he will get the first $1200 stimulus round as part of his 2020 return, but you might lose some education credits and there could also be ACA premium credits to consider.

Already planned to run the taxes both ways. And the ACA premium tax credits are an issue. He decided not to take insurance through his work (didn't understand the intake paperwork - just filled out that he had insurance already). So he's still on our ACA plan. Will need him to ask HR about how much benefits would cost him through work...

 

[cathy63]

Emphasis added.

The way the rules are written, I'm fairly certain that a student who is not a dependent can claim the AOTC even if the parent paid the $4000 OOP. (See instructions for Form 8863.) I don't know if the LLC or other education benefits are written similarly.

I agree about the ACA premium credits point though. Since my DS20 is not my dependent this year, my family size will be reduced from 3 to 2, which will affect my ACA APTC. It'll be interesting to see how things turn out this year.

I can't remember all the details now, but I did returns for a family with a similar borderline dependent situation when I was volunteering earlier this year and it did work out better to claim the student on the parents' return. I think it may have been the non-refundable part of the AOC that was the problem in that case. Anyway, it's probably still a good idea to look at it both ways, especially if there's a second round of Covid stimulus later on this year.

 

[cathy63]

Already planned to run the taxes both ways. And the ACA premium tax credits are an issue. He decided not to take insurance through his work (didn't understand the intake paperwork - just filled out that he had insurance already). So he's still on our ACA plan. Will need him to ask HR about how much benefits would cost him through work...

Gotta love teenagers trying out their independent thinking skills. Hopefully he's earning so little that it doesn't qualify as affordable insurance, and him declining it won't hurt you too much.

 

[SALTedOut]

SecondCor521, Your facts are different but for other people's dependency planning I accidentally solved the problem when my kids were younger.

I contributed most of their college funds to a UTMA account and some to a Coverdell Education IRA (probably 80/20 ratio). I debated going the 529 direction but for various reasons I didn't. Some of the funds deposited in the UTMA when they were young were held for 15+ years (late '90s to 2015 where some high growth years) and there was a lot of taxable gains I was not looking forward to.

Here's where the accidental planning happened:

When my kids went to college their UTMA covered all of the cost of college including tuition, room/board, books, etc. Because the UTMA is technically (and legally) their money I was no longer paying for over 50% of their costs. Being 19+ and paying their own costs made them not my dependent.

That benefited us a few ways.

1. At that time I was over the income phase out for the personal exemption so I would not have been able to benefit from them being my dependent. I know personal exemptions don't exist anymore but I think the rest of the planning works.

2. They filed their own return and took the standard deduction and personal exemption. This covered a lot of their summer job income and cap gains from the sale of investments paying for their college.

3. They also qualified for the AOTC (which I would not have because of income limits). This allowed them to sell excess investments each year to use up the rest of the credit and get.a "free step up in basis". If I recall correctly they could have almost $25K of taxable income each year and pay no tax.

Over the 4 years each kid paid no taxes since we planned out the cap gain reporting to maximize the benefits of the standard deduction, personal exemption and AOTC.

 

[sengsational]

That's a great UTMA story. Being independent, your income and assets don't go on the FAFSA. So although they expect the student to wipe out all their assets in 4 years, at least they don't expect a pound of flesh from you.

 

[SecondCor521]

I was re-reading some of my old threads and wanted to post a follow up.

The DS20 mentioned did end up filing his own tax return as not-my-dependent. Although we chose this based on an honest reading of the facts and circumstances of him and his 2020 year, it does look like it also turned out for the best tax-wise. He was able to claim EIP1 and EIP2 on his 2020 return, and ended up with zero federal income tax liability, although he had SE taxes to pay on his SE income.

I elected to skip having him claim the AOTC for 2020 as the fact set was simply too unclear to determine whether or not he would qualify, and I feel confident that I will have three more tax years of him in undergraduate that will be better suited to the credit.

I will note for completeness that for us the AOTC is generally better claimed on the parents' return, as on the student's return the non-refundable portion can be wasted due to lack of offsetting income tax liability.

That's a great UTMA story. Being independent, your income and assets don't go on the FAFSA. So although they expect the student to wipe out all their assets in 4 years, at least they don't expect a pound of flesh from you.

I also wanted to comment on this.

"Tax independent" and "FAFSA independent" are two different things determined in two different ways. It is much harder to be a FAFSA independent. So even if your kid is a tax independent it is quite likely that you as a parent will be required to put your income and assets on their FAFSA and their SAI (formerly EFC) will be affected. (*)

(*) There are a couple of FAFSA loopholes that may excuse you from reporting assets - SNT and auto-zero EFC.