Allocation of college costs between student and parent(s)

[FEDUKE404]

Never mind.

[ATSMAN]

If memory serves me right I did a return 2 years back where the child (18 or 19 yrs old) was NOT claimed by either parents because he was making close to $12K part-time, had his own apartment and took the full AOC credit including the refundable portion. His parents could not have claimed any AOC because their AGI was over 180K.

[rbynaker]

There's a chart on TTB 12-1. For AOTC & LLC, as long as the parents forego claiming the student, the credits go to the student. The AOTC will generally not be refundable in this case, but it can be used to offset tax. For refundable AOTC, the student must have earned income greater than half of their own support (follows the same rules as kiddie tax.) Translation, they have to save at least half of their earned income. It's what I call a "unicorn" situation. A legendary creature that I've never actually seen in the real world. Either the student actually provided more than 50% of their own support (in which case, they get their own exemption and the discussion is moot), or they didn't have enough income to get over the kiddie tax hurdle.

Rick

[Dude]

I don't know why a student would want to claim his own credits if the net benefit is much higher for the parent. "If the student is over age 18 and under age 24 at the end of 2018 and a full-time student and the earned income was less than one-half of his support ( and either parent was alive at the end of the year they are not eligible for the refundable portion of the AOTC. https://www.irs.gov/pub/irs-pdf/i8863.pdf

[jmcdtax]

You can allocate a portion of the scholarship to room & board. This can be done by creating a 1098-T assigned to the student and your software should allocate it as wages and the student will have to pay taxes on that amount. Look up R&B charges on the college website. You can not allocate more R&B charges than what the college typically charges even if the student is living off campus. Take up to $4000 of tuition for AOTC on parents return. You have a more difficult task because of the 529 plan payout. If the tuition, R&B, books etc. are covered by the 529 you may not be able to do much. No double dipping. See irs Pub 970, page 14 and see: https://www.irs.gov/pub/irs-utl/Pell...04%20pager.pdf

[Dude]

Not all 529's are the same, it depends on the state. Sure, you should not use the tax free portion of the 529 distribution to pay qualified expenses but I don't see why you can't use your "basis" in the plan as out of pocket. These are after tax dollars. That being said, the easiest thing to do is to allocate 529 money to non qualified expenses first.

[Lion]

Are you trying to move some education expenses to the parents so parents get AOC? Or, are you trying to qualify the student for ed credits? Which way are you moving? The most common move I see is for the student at his low tax rate to take the hit for some taxable monies to move some education expenses to the parents if they qualify for the AOC. That just requires running the numbers. Read Pub 970 that JMCD referenced.

[rbynaker]

I guess my question somewhat boils down to whether a parent, whose child is clearly a dependent, can "UN-claim" the child as a dependent and then let the student rake in whatever education credits are out there? Parents with large income would only lose the $500 "dependent" payment and, in theory, the student (if claiming himself) might exceed that amount using available education credits.

Correct. Yes, the parents can choose not to claim. Typically your analysis is $500 ODC vs whatever AOTC benefit you can get on the student return. The student would have to have a good bit of income/tax to make this worth it since you're not likely to qualify for refundable AOTC.

[dtlee]

I guess my question somewhat boils down to whether a parent, whose child is clearly a dependent, can "UN-claim" the child as a dependent and then let the student rake in whatever education credits are out there?

FE,

Not "whatever education credits are out there."

The credits are available if the student is NOT claimed. However, the refundable portion of the American Opportunity Credit follows the rules for the "Kiddie" tax (earnings must exceed ½ of support), so if they are eligible to be claimed as a dependent, in most cases (except when a large amount of earnings are placed in savings) a dependent will not be able to claim the refundable credit.

[Lion]

You'll just have to run the numbers both ways. The parents can claim the dependent, get the $500, maybe the Tuition Deduction will come back with higher income phaseout, anything else that helps them. Or parents do not claim child who still can NOT claim himself, but child can get AOC, but NOT the refundable part so can take his tax liability down to zero only. Does he need that after the higher standard deduction? Only you know the numbers. If child pays more than half his own support, parents can NOT claim child. A lot of moving parts even before you work with 529, ROTC, scholarships, etc.

[Lion]

In your scenario, it sounds like the student can NOT claim himself. Hand him a support worksheet to fill out to prove it one way or the other. It also sounds like the student may have little to no tax liability with low income and high standard deduction, even as a dependent. Run the numbers both ways. If student gains little or nothing vs. parents gaining what amount vs. nothing, what's the highest for the family? Give them all the information for THEM to decide while you keep your distance! Your job is to give them all the tax facts so they can argue the non-tax issues they have in that family. For instance, parents are better by $1,000 but kid can only gain $100; parents can give kid $200 and still be ahead; that kind of thing. But, they can't reach a resolution until you give them their options.