Somewhat technical tax question

[SecondCor521]

Hi all,

I have a question that ultimately relates to line 2b of Form 8962 (APTC) for 2019.

My middle son graduated from high school in May, has a summer job, and will be attending college full time starting in August.

He will make approximately $3,780 in W-2 wages from his summer job. He will also have $1,083 in taxable scholarships related to college. We will also be making an excess withdrawal from his 529 to pay for his university health insurance in the amount of $1,724. The health insurance is not a qualified educational expense, so it will be taxable as other income on Schedule 1 line 21 (See Pub 970 chapter 8).

I plan to claim him as my dependent for 2019. He plans to file to get a refund of his federal income taxes withheld from his W-2 summer job. I would like to exclude his AGI of $6,587 (the total of the three numbers from the previous paragraph) from my Form 8962. Can I?

The instructions for Form 8962 line 2b say: "Enter on line 2b the combined modified AGI for your dependents who are required to file an income tax return because their income meets the income tax return filing threshold. Use Worksheet 1-2 to figure these dependents’ combined modified AGI. Do not include the modified AGI of dependents who are filing a tax return only to claim a refund of tax withheld or estimated tax."

Since I plan to claim him as a dependent, I go to the Form 1040 instructions for "Who must file?", Chart B on page 11. He is single, under 65, and not blind.

Clearly his earned income is his W-2 plus his taxable scholarship, or $3,780+$1,083 = $4,863. Is his 529 non-qualified withdrawal considered unearned income in this scenario even if it is not listed in the description at the beginning of Chart B ("In this chart, unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust.")?

What seems odd is that if we consider him not required to file due to not meeting the income thresholds, he will still file to get a refund of his federal taxes withheld from his W-2 job. But then he will end up with a taxable income of $1,374 which he'll end up owing taxes on:

Form 1040

1. W-2 $3,780
Scholarship $1,083
6. 529 NQ withdrawal $1,724
7. AGI $6,587
8. SD $5213 (calculated as $3,780+$1,083+$350 per standard deduction for dependents worksheet)
10. TI $1,374

So it would seem weird and wrong to say he's filing just for a refund when his return would show that he'll end up paying some taxes. So he doesn't seem to qualify according to the last sentence in the instructions for line 2b.

Alternatively, can I report that $1,724 excess withdrawal from his 529 on my tax return? It would be to reimburse me for his university health insurance, which I am paying for. It would increase my AGI, but not as much, because it would exclude his W-2 and scholarship from my Form 8962 amount.

Another thought would be to just make a non-qualified withdrawal of $1,049 from his 529 to partially offset the $1,724 expenditure. Then he would not be required to file per Chart B on page 11 of the 1040 instructions (except, of course, to get his refund).

Thanks for any suggestions, answers, clarifications, or input.

[Souschef]

According to my tax book, his SD is $12,000or his taxable income, whichever is lower. He only has to file to get his withholding back

[Kwirk]

I'm possibly wrong but I don't know that the 529 withdrawal is taxable unless it is from gains. Contributions can be withdrawn without federal tax or penalty, I think. There may be state income tax to pay if the contributions were previously deducted.

[Jerry1]

Quote:

Originally Posted by Souschef According to my tax book, his SD is $12,000or his taxable income, whichever is lower. He only has to file to get his withholding back

^^This^^

Part of the last changes to the tax code gave people who could be claimed on other people’s taxes the ability to use the standard deduction. Basically giving low income earning dependents tax free earnings.

[SecondCor521]

Quote:

Originally Posted by Kwirk I'm possibly wrong but I don't know that the 529 withdrawal is taxable unless it is from gains. Contributions can be withdrawn without federal tax or penalty, I think. There may be state income tax to pay if the contributions were previously deducted.

Right, I forgot to say that I was ignoring that part. After going through the math (similar to Example 2 on page 53 of Pub 970), it looks like he'll only have $69 of a taxable 529 distribution. The original questions still stand.

@Souschef, your tax book doesn't seem to match IRS Form 1040 instructions, chart B. Did you look at the section for individuals who can be claimed as a dependent?

[pb4uski]

Quote:

Originally Posted by Souschef According to my tax book, his SD is $12,000or his taxable income, whichever is lower. He only has to file to get his withholding back

Quote:

Originally Posted by Jerry1 ^^This^^ Part of the last changes to the tax code gave people who could be claimed on other people’s taxes the ability to use the standard deduction. Basically giving low income earning dependents tax free earnings.

No. From the IRS:

Quote:

Dependents - If you can be claimed as a dependent by another taxpayer, your standard deduction for 2018 is limited to the greater of: (1) $1,050, or (2) your earned income plus $350 (but the total can't be more than the basic standard deduction for your filing status). https://www.irs.gov/taxtopics/tc551

[pb4uski]

Quote:

Originally Posted by SecondCor521 Right, I forgot to say that I was ignoring that part. After going through the math (similar to Example 2 on page 53 of Pub 970), it looks like he'll only have $69 of a taxable 529 distribution. The original questions still stand. ...

But as long as the taxable portion of his 529 distribution is less than the $350 standard deduction in addition to his earned income then you should be all set... right?

[Souschef]

Quote:

Originally Posted by SecondCor521 @Souschef, your tax book doesn't seem to match IRS Form 1040 instructions, chart B. Did you look at the section for individuals who can be claimed as a dependent?

My tax book comes from the IRS. I volunteer with the AARP Tax Aide program. I looked at the instructions, and the key words of who must file are;
Gross income of $11,650 +$350. Your son is far below that, but should file to get his withholding back.

[pb4uski]

Quote:

Originally Posted by Souschef My tax book comes from the IRS. I volunteer with the AARP Tax Aide program. I looked at the instructions, and the key words of who must file are; Gross income of $11,650 +$350. Your son is far below that, but should file to get his withholding back.

It's a little more complicated than that.

Quote:

If a child has both earned and unearned income, he or she must file a return for 2019 if: unearned income is over $1,100 earned income is over $12,200, or earned and unearned income together total more than the larger of (1) $1,100, or (2) total earned income (up to $11,850) plus $350. https://www.nolo.com/legal-encyclope...ax-return.html

In OP's scenario in post #1, earned and unearned income together total more than total earned income plus $350... so the dependent has taxable income and must file a return.

Now in post #5 the OP amended the unearned income to be less than $350... so a return isn't required and the OP's som doesn't have taxable income... but he would want to file a return to get his witholdings returned to him.

[SecondCor521]

Quote:

Originally Posted by pb4uski But as long as the taxable portion of his 529 distribution is less than the $350 sandard deduction in addition to his earned income then you should be all set... right?

Ah, yes. You're right. The $69 is probably considered unearned income (even though it isn't listed in the Chart B - standard deduction for dependents - text), but in any case is less than that $350 or the grand total is less than the $12K number, so he is not required to file a return and the only reason for him to file is to get his withholding back, so I don't have to report his MAGI on my Form 1040 Form 8962 line 2b.

Thanks!

[pb4uski]

Quote:

Originally Posted by Jerry1 Just because he has to file a return doesn’t mean he has taxable income. Which, after the standard deduction, he will not. His return will essentially informational except it will also get him his withholding back.

Since his earned income is under the limit, if his unearned income exceeds $350 then he would have taxable income. See the OP... he would have $1,374 of taxable income since his $1,724 of unearned income exceeds $350 allowed in the standard deduction calculation for dependents.

If you look at the construction of the requirement to file for dependents in post #9, essentially if you have taxable income then you are required to file... if you don't have taxable income then you are not required to file.

[Jerry1]

pb4uski,

Publication 501 states:

The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the greater of:

$1,050, or
The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $12,000).

The tax topic you quoted is not authoritative and while close to the Pub 501 wording leaves out the amount. A dependent can get up to the $12,000 standard deduction.

[pb4uski]

Authoritative or not they say the same thing, except your reference is for 2018 and the one I provided is for 2019. It is just that the authoritative one is poorly worded and the unauthoritative one is clearer.

Either way, applied to the info in the OP, the son has a standard deduction of earned income plus $350 and taxable income of $1,374....the excess of his unearned income of $1,724 over $350.

Do you disagree with that? If so, elaborate and provide your calculations.

[SecondCor521]

Quote:

Originally Posted by Jerry1 pb4uski, Publication 501 states: The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the greater of: $1,050, or The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $12,000). The tax topic you quoted is not authoritative and while close to the Pub 501 wording leaves out the amount. A dependent can get up to the $12,000 standard deduction.

Well anyway, his modified return would be more like:

Form 1040

1. W-2 $3,780
Scholarship $1,083
6. 529 NQ withdrawal taxable amount $69
7. AGI $4,932
8. SD $5213 (calculated as $3,780+$1,083+$350 per standard deduction for dependents worksheet)
10. TI $0

[pb4uski]

^^^^ Agreed. Post #1 modified by post #5.

If post #1 only then TI would be $1,374 as shown in post#1.

[Jerry1]

Quote:

Originally Posted by pb4uski Authoritative or not they say the same thing, except your reference is for 2018 and the one I provided is for 2019. It is just that the authoritative one is poorly worded and the unauthoritative one is clearer. Either way, applied to the info in the OP, the son has a standard deduction of earned income plus $350 and taxable income of $1,374....the excess of his earned income of $1,724 over $350. Do you disagree with that? If so, elaborate and provide your calculations.

No, I do not disagree. In reading your posts, I thought you were saying he didn’t get the standard deduction (as it was in years past where a dependent did not get it). Of course as a practical matter, the standard deduction is limited to the earned income (can’t go below zero). I apologize if I misinterpreted your posts.

[Souschef]

Here is the bottom line:
1. He owes no income tax because the Gross Income is below $11650+$350
2. He has to file to get his withholding back.

[pb4uski]

^^^^ Correct as long as his unearned income is below $350 and his total income is below $12,200... but if his unearned income >$350 then he will owe tax even if his total income is below $12,200.

[Winemaker]

In order to educate myself in the new tax code, I ask this question. What would incur if the dependent paid his gross income to a tIRA?

I did that several times to my daughter back in the 00's to eliminate her tax back when she was in college. She did not have any 529 money, and she was on our own health insurance.