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Old 08-01-2020, 06:03 PM   #21
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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.
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Old 08-02-2020, 08:09 AM   #22
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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.
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Old 04-14-2021, 10:38 AM   #23
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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.

Originally Posted by sengsational View Post
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.
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