Education credits for high-income parents

[FEDUKE404]

Long-term clients - married couple with two college age children. College education credits (AOC for one, LLC for other) are theoretically available. Children have normal summertime income and will each file a tax return, but parents definitely provide more than 50% of their support.

BUT in 2016 the parents' income spiked due to an investment issue. When all is said and done, their taxes are through the roof to include AMT, Form 8960, limited Schedule A deductions, and personal exemptions for four individuals totaling. . .zero.

QUESTION: For the children, dealing with the "were you claimed as a dependent?" and "can you be claimed as a dependent?" issues, is there any problem with this scenario where the children **DO** claim their own personal exemptions and perhaps glean something from their otherwise unusable 2016 personal exemptions and/or education credits? (I realize the refundable / nonrefundable issues will come into play also.)

Suggestions? Clarifications?

Thanks.

FE

[Lion]

If the parents do NOT claim the dependency exemptions that they are entitled to but that give them no benefit this year, the children still need to check YES to Can you be claimed as a dependent. But, because NO one does claim them as dependents, they can qualify for the non-refundable AOC &/or LLC benefits. Not the refundable, though. And, not the T&F deduction.

TTB 12-1 and other pages.

[Roland Slugg]

I fully concur with Lion's response above, but can't help but wonder if taking the AOC really makes any difference. Does either student earn enough from his/her summertime job (and other sources, if any) to incur a tax liability? If so, the nonrefundable AOC will reduce or eliminate that tax. If the students incur no tax liability, however, then the entire discussion is moot.

[Rapid Robert]

BUT in 2016 the parents' income spiked due to an investment issue. When all is said and done, their taxes are through the roof to include AMT, Form 8960, limited Schedule A deductions, and personal exemptions for four individuals totaling. . .zero.

QUESTION: For the children, dealing with the "were you claimed as a dependent?" and "can you be claimed as a dependent?" issues, is there any problem with this scenario where the children **DO** claim their own personal exemptions and perhaps glean something from their otherwise unusable 2016 personal exemptions

You make it sound like getting an income windfall is a bad thing, which obviously it is not.

YES, it is a huge problem (= incorrect) for the child to claim a personal exemption deduction when they can be claimed by someone else. See Pub 17.

"You can take one exemption for yourself unless you can be claimed as a dependent by another taxpayer. If another taxpayer is entitled to claim you as a dependent, you cannot take an exemption for yourself even if the other taxpayer doesn't actually claim you as a dependent."

[Rapid Robert]

include AMT, [...] and personal exemptions for four individuals totaling. . .zero.

One thing that many don't realize is that AMT does not include any personal exemptions at all, it doesn't matter whether you have any kids or not, only your filing status. So yes, the moment they are subject to AMT, their personal/spouse/dependent exemptions are useless. The fact they are even shown on the 1040 page 2 in an AMT scenario is one of the reasons everyone thinks AMT is so complicated. It is actually much simpler and easier to understand than the regular tax system.

[FEDUKE404]

Where IS that exemption going??

Of course, we can't trust anything printed in those nasty old IRS publications, etc. . . correct? (See continuing chats on 2016 SEHI rules from Pub 535 versus "the memorandum.")

Children will definitely have enough income to have tax liability (absent any credits) without using "their" personal exemption, and if they can use their personal exemption their taxes will be low or nonexistent. Kiddie tax is not an issue. Toss in college credits, and all that really can perhaps be gleaned is some of the AOC for the younger sibling. Yeah. . .a moral victory of sorts.

AMT issues for dependents were already understood.

For now I have no "real" 2016 numbers for parents or the two children, so I am reluctant to stick my neck out too far. I did think, given the situation stated, that the parents could defer on claiming the children as dependents and let the two children then claim their own exemptions (primarily to lower tax liability and/or to snag some education credits). Perhaps I was wrong. . .happens frequently these days.

As for the "getting income is a bad thing" comment, I take that with a grain of salt. OK, the parents should be happy and (maybe even) "pay their fair share." That's a given. But I have another client with a similar high income bump for the 2015 tax year, and since the married couple made "too much" and are >65 YOA they got IRMAA'ed for calendar year 2017. Both husband and wife are now paying more than double their regular Medicare B and D premiums during the current year. . .for a tax event that occurred in 2015. I **DO** have a real problem with that!!

Oh well. Thanks for all input.

FE

[Burke]

Me. Too. Interestingly, I have a client (MFJ) who received a letter from SSA in Nov 2016, stating that their MC premium for 2015 would be subject to IRMAA based on their income from 2013. Then it proceeds to state "In January, 2015 you reported a life-changing event that reduced your 2015 MAGI. We can use a more recent tax year return if it significantly lowers your MAGI."

Really? I am assuming the "life changing event" was that he retired. PS: In his case, it did not matter. The 2015 income was even higher.

[Lion]

If the parents do NOT claim the dependency exemptions that they are entitled to but that give them no benefit this year, the children still need to check YES to Can you be claimed as a dependent. But, because NO one does claim them as dependents, they can qualify for the non-refundable AOC &/or LLC benefits. Not the refundable, though. And, not the T&F deduction.

TTB 12-1 and other pages.

If the parents do not take the dependency exemptions that they are entitled to, the children still DO NOT qualify to take their own exemptions if anyone else is eligible to claim them. This method works NOT because the children get their exemptions, but because the parents then no longer qualify for AOC so the children get the NON-refundable portion of AOC if needed to lower their tax liabilities.

The children will not lower their tax liabilities via personal exemptions if anyone else is eligible to claim them as dependents. Start with TTB and then go to the code to understand this issue.

[FEDUKE404]

Avoiding IRMAA surcharges on Medicare

Me. Too. Interestingly, I have a client (MFJ) who received a letter from SSA in Nov 2016, stating that their MC premium for 2015 would be subject to IRMAA based on their income from 2013. Then it proceeds to state "In January, 2015 you reported a life-changing event that reduced your 2015 MAGI. We can use a more recent tax year return if it significantly lowers your MAGI."

Really? I am assuming the "life changing event" was that he retired. PS: In his case, it did not matter. The 2015 income was even higher.

I've seen the same letter and also wondered about the "reconsideration" issue. The sequence is high tax year A, report on tax return for year A in year A+1, and pay increased Medicare charges for entire year A+2. Situations I've encountered so far:

#1 - Client with large stock sale (a "one time event"?) was hit with ~2x IRMAA and now will continue to have at least 1x IRMAA due to other investment income / retirement.
#2 - Client sold home with large taxable gain. Obviously a one-time event? Can they escape IRMAA?
#3 - Client made a "wise move" and cashed in a lot of his 401k to pay off the mortgage. Another one-time event? Resulted in ~2x IRMAA. Normal future returns are unlikely to get hit with IRMAAs, with possible exception due to RMDs for H/W are just around the corner.

I always figured you were stuck with at least one year's worth of IRMAA for the "wealthy year" that created the event. Is there an exit??

What a mess.

FE

[Burke]

I've seen the same letter and also wondered about the "reconsideration" issue. The sequence is high tax year A, report on tax return for year A in year A+1, and pay increased Medicare charges for entire year A+2. I always figured you were stuck with at least one year's worth of IRMAA for the "wealthy year" that created the event. Is there an exit??FE

See SSA-44 form for application and defining of life-changing event. https://www.ssa.gov/forms/ssa-44.pdf.

[kathyc2]

Long-term clients - married couple with two college age children. College education credits (AOC for one, LLC for other) are theoretically available. Children have normal summertime income and will each file a tax return, but parents definitely provide more than 50% of their support.

BUT in 2016 the parents' income spiked due to an investment issue. When all is said and done, their taxes are through the roof to include AMT, Form 8960, limited Schedule A deductions, and personal exemptions for four individuals totaling. . .zero.

QUESTION: For the children, dealing with the "were you claimed as a dependent?" and "can you be claimed as a dependent?" issues, is there any problem with this scenario where the children **DO** claim their own personal exemptions and perhaps glean something from their otherwise unusable 2016 personal exemptions and/or education credits? (I realize the refundable / nonrefundable issues will come into play also.)

Suggestions? Clarifications?

Thanks.

FE

If I'm understanding you correctly, in most years the parents income would not be high enough to eliminate AOC? If that's the case I probably wouldn't waste one of the 4 available years if the kid only receives a small benefit this year.

[FEDUKE404]

IRMAA life-changing event

See SSA-44 form for application and defining of life-changing event. https://www.ssa.gov/forms/ssa-44.pdf.

Looks as if my IRMAA folks are receivers of the proverbial shaft.

I did find it interesting that "marriage" and "work reduction" can be deemed life-changing events.

Thanks for the link. I'll file it with the Schedule R instructions.

FE