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1098-T - better for parent or student to claim it?

sushisushi Posts: 256Registered User Junior Member
edited February 2008 in Parents Forum
Have you all found a big difference (refund wise, I guess) if you versus your child claims the 1098-T amount on their tax return? Will it bring up a red flag if my daughter, who made only 5k this year, is entering that she paid 20k in tuition after scholarships? I guess I'd prefer she claim it than her dad or I, since he and I are divorced and though both contributed with our daughter toward her tuition, we'd then have to figure out who gets to claim it and how then to share the benefit with the other parent.

Also, how many have used TaxAct? It sounds appealing in that it will somehow input stuff for FAFSA? How does that work?

Thanks.
Post edited by sushi on

Replies to: 1098-T - better for parent or student to claim it?

  • stlmomstlmom Posts: 57Registered User Junior Member
    Your daughter can only claim the education credit or tuition deduction if both you and your ex do not claim an exemption for her on your income tax returns. Unless your AGIs are so high that your exemptions are phased-out, it usually does not make sense to do this.
  • wisteriawisteria Posts: 625Registered User Member
    If she only made 5K this year (and it was all wages), then she will not have any tax liability and therefore she will not get any benefit from the tuition tax credits.

    The parent who claims her as a dependent on his/her return is the one who gets to claim the associated college tuition credits (as well as other tax benefits associated with her, such as the dependency exemption and possibly Head of Household filing status as well.)

    There are maximum income limits for claiming tuition tax credits, so it's possible that one or both parents may make too much money to qualify.

    Here's a link to definitive information about education tax benefits (including examples) from the IRS:

    Publication 970 (2007), Tax Benefits for Education

    In general, it will not bring up red flags for a student to claim the benefits AS LONG AS nobody else claims her as a dependent on their return. The IRS recognizes it as a perfectly legitimate thing to do--if both parents forego claiming a student on their return, the student may claim the education tax credits for tuition paid to the college, no matter who actually paid that tuition (mom, dad, grandma, uncle, family friend, godfather, etc.) (Exception: if tuition was paid by an employer as a fringe benefit for the child or the parent, that would not qualify for tuition tax credits. Also, tuition paid by scholarships or grants does not count toward the credit, of course.)

    Note that even if both parents forego claiming a child that they are entitled to claim on their returns, that child may still NOT claim her own personal exemption, but she may claim the tuition tax credits.

    However, all of this is moot for your daughter this year--since she should not owe taxes on 5K of earned income, and thus will not benefit from Federal tuition tax credit.

    (State tuition tax credits are a whole other kettle of fish. I'd advice going to your state tax department website and reading the fine print carefully. Many tax professionals and financial aid professionals are confused about these details.)
  • thumper1thumper1 Posts: 32,614Registered User Senior Member
    And remember that if you do NOT claim your child as a dependent, you might not be able to continue to carry them under your health insurance, car insurance and homeowner's insurance. We checked that first. In our case NONE of these insurance policies were available on our plans unless our kids remained dependents...which they really both are...but we could have spun DS off!!
  • xiggixiggi Posts: 21,634Registered User Senior Member
    Note that even if both parents forego claiming a child that they are entitled to claim on their returns, that child may still NOT claim her own personal exemption, but she may claim the tuition tax credits.

    The use of the word "may" is a perfect illustration on how muddy this entire taxation question is.

    The correct position is defined by applying the various dependency tests. Accordingly, it is ENTIRELY feasible for a student to be independent for tax purposes but dependent for FAFSA or other elements.

    As an example, students with very low EFC are probably better off filing their taxes as independent and reporting income, expenses, and ALL deductions (including their personal exemption.)

    However, since no two situations are identical, there is simply no way to offer general advice here.
  • sushisushi Posts: 256Registered User Junior Member
    Thank you very much for taking the time to respond. That's very interesting that if she were to claim the education tax credits (and of course therefore her dad and I would not), that she wouldn't be able to even claim herself as a personal exemption. Thank you for pointing out that if I don't continue to claim her as a dependent, this could foul up her being covered under my health insurance policy, etc. Sounds like it is best that I continue to claim her, claim the education tax credit this year and figure out something to offer to my ex-husband.
  • wisteriawisteria Posts: 625Registered User Member
    xiggi, if one or both parents are entitled to claim a Qualifying Child dependent on their return, that child MAY NOT claim her own personal exemption on her return.

    And by MAY NOT, I mean that she is NOT legally entitled to claim her own personal exemption, whether or not her parents forego their right to claim her on their return.

    As for CAN NOT, well, if her parents did not claim her on their returns even though she was their Qualifying Child dependent, she probably CAN file a return claiming her own personal exemption, in the sense that the IRS might process the return without flagging it, but it would not technically be legal for her to do so.
    If I claim my daughter as a dependent because she is a full-time college student, can she claim herself as a dependent when she files her return?

    If you claim your daughter as a dependent on your income tax return, she cannot claim herself on her income tax return.

    If an individual is filing his or her own tax return, and the individual can be claimed as a dependent on someone else's return, the individual cannot claim his or her own personal exemption. In this case, your daughter should check the box on her return indicating that someone else can claim her as a dependent.

    Source IRS FAQ page:
    Frequently Asked Questions - 2.3 Dependents & Exemptions
    (scroll to bottom)
    Your Own Exemption

    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 does not actually claim you as a dependent.

    Source:
    Publication 501 (2007), Exemptions, Standard Deduction, and Filing Information

    However, she CAN and MAY claim tuition tax credits on her return as long as her parents did not claim her dependency exemption on their return, regardless of whether they were entitled to do so.
  • xiggixiggi Posts: 21,634Registered User Senior Member
    Wisteria, I believe you paid little attention to what I wrote before jumping on quoting IRS sections with which I am very familiar.

    I wrote, "The correct position is defined by applying the various dependency tests. Accordingly, it is ENTIRELY feasible for a student to be independent for tax purposes but dependent for FAFSA or other elements."

    The difference in our positions is that you believe that the right for a parent to claim his or her child as a dependent is absolute. This "entitlement" has, however, to be weighted against the facts considered in the IRS dependency test. In many cases with very low EFC parents, the test of support becomes strenuous, especially when counting (or discounting) scholarship income correctly and considering that the primary borrower is the ... student. Add in the mix that most schools that offer very generous aid insist on work-study and a substantial SUMMER EARNINGS EXPECTATION by the STUDENT.

    Some of the tests include:
    ** The child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student, or (c) any age if permanently and totally disabled.

    ** The child must have lived with you for more than half of the year.

    ** The child must not have provided more than half of his or her own support for the year.

    In so many words, while the parents may think they qualify for the entitlement, they may fail the dependency test.
  • ebeeeeeebeeeee Posts: 5,199Registered User Senior Member
    Obviously this is a complex situation. For that reason, we have a CPA run our returns both ways each year to determine whether we should declare our now 19 year old sophomore as our dependent or not. I would strongly urge that anyone who is uncertain consult a professional who can go through their individual situation.
    We have many very professional, very articulate CCers but they are not familiar with ALL of the details of your situation.
  • somemomsomemom Posts: 9,123Registered User Senior Member
    You or your child may have a tax payable, to which the credit will apply, if your scholarships exceed tuition- that is a taxable event.
  • thumper1thumper1 Posts: 32,614Registered User Senior Member
    And again I suggest you check the dependency requirement for your health insurance if your child is on it. OURS is very clear...child MUST be a dependent...or no coverage on our plan.
  • wisteriawisteria Posts: 625Registered User Member
    The difference in our positions is that you believe that the right for a parent to claim his or her child as a dependent is absolute.

    xiggi, I certainly don't believe that the right for a parent to claim his or her child as a dependent is absolute. I never stated that parents are always entitled to claim their children as dependents. You are reading entirely too much into my statements.

    For that matter, I have in fact personally helped college students to determine that they could not be claimed by their parents and that they therefore could indeed claim themselves on their own tax returns.

    What I did say is
    if one or both parents are entitled to claim a Qualifying Child dependent on their return, that child MAY NOT claim her own personal exemption on her return.

    Please note the use of the condition word "if" in my quote. I certainly did not say that parents are always entitled to claim their child. I said that "if the parents are entitled to claim the child," then the child may not claim her own exemption, whether or not the parents choose to claim her.

    It is entirely possible that a college student may not meet the criteria to be a qualifying child dependent of her parents. I said nothing to rule out that possibility, and certainly there are college students who do not meet the criteria to be claimed by their parents. They can and should claim themselves.

    Under the facts stipulated by the OP, it appears that the daughter is the Qualifying Child dependent of her parents unless she (a)was over 24 or (b) was not a fulltime student for at least 5 months in 2007 or (c) was married or (d) had established a permanent residence apart from her parents' home. (College students are considered to be "living with" their parents even if they are temporarily absent from home for educational reasons, medical reasons, vacations, etc.)

    Examples of college students whom I have personally helped to determine could not be claimed by their parents:

    a) Student over 24
    b) Students was between 19 and 24 but was not a fulltime student for at least five months during the tax year
    c) Student provided more than 50% of own support (typically this happens when the student earns a significant amount of money and the student's net costs of education are relatively low, either due to attending an inexpensive cc or state school or a private school with large grants, so the child did not receive much parental support)

    These students were entitled to claim themselves. (It was also necessary, in the above cases, to rule out the possibility that they could be Qualifying Relative dependents of their parents, which can sometimes apply even when the child fails to meet the Qualifying Child dependency criteria.) Even if they choose NOT to claim themselves, the parents were not entitled to claim them.

    At this point, we are in 2008, however, it is really too late to change the facts about whether a student qualified as the parents' dependent in 2007. The facts are what they are. Either the child qualified as the parents' dependent, in which case she may not claim herself. OR the child did not qualify as the parents' dependent, in which case they may not claim her.

    Back in 2007, there were still choices to be made that could affect the determination of dependency on the 2007 return--the child could make decisions about whether to be a fulltime student, how much to contribute to her own support (either by taking loans, by earning more money, or by taking money out of her own savings and using it for her support.) For that matter, the child could have made a decision to get married before the end of 2007, which could have affected her parents' ability to claim her as their dependent.

    But, at this point, the 2007 facts are the 2007 facts. Either the child met the criteria or she didn't.

    It can indeed sometimes be quite complicated and consulting a tax professional is a very good idea, especially if there are concerns about insurance qualifications. As xiggi points out, FAFSA dependency is an entirely distinct determination from IRS dependency.

    Low income college students and their parents can get free help from IRS certified Volunteer Income Tax Assistance (VITA) sites. For that matter, college students may want to get free IRS training and certification and become VITA volunteers themselves. The training is available on-line here: Link & Learn Taxes, linking volunteers to quality e-learning
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