For tax year 2019, DS1 has room and board paid for as an RA. And he will have a summer internship for additional income. We paid all the tuition from 529 plan in 2018 , so I realize we are not eligible for any tax credits. For TY 2018, he is a dependent ( RA only started Sept. 2018) and he will also file a tax return for his income in summer 2018.
For TY 2019, I only want to withdraw from the 529 plan the amount of the tuition minus $4000, He will not make enough in 2019 to owe any tax, so he should be able to get the max refundable credit of $1000. He has enough funds to cover the $4000 on his own.
Question: For TY 2019, can he get the tuition credit if he files on his own for TY 2019 , and we do not list him as a dependent? Thank you for any information you can share from your experience.
No, the RA benefits are not a third party giving him money. He’s earned it but usually there is no 1099 or W2 issued, it is a wash as the employer requires the employee to live in employer provided housing.
The RA benefits are in exchange for doing the work and shouldering the responsibilities required of an RA. The benefits would be support provided by the student, same as if the student were earning money for working in the dining hall.
I agree, unless the 529 account is owned by the student.
Looking at the IRS worksheet link from an earlier post, the RA benefits seem to count as nontaxable income under “Funds belonging to the student”, which is what belknappoint pointed out. (I say “Seem to count” because I am not 100% sure).
DS1 attends in-state public, and so the tuition from the 529 plan + other parental support amount would be less than the total of RA benefits+intern income. While there is no 1099 or W2 for the RA benefits, I do have a dollar value from my kid’s college statements for the room and board benefit.
Note that counting the RA benefits as part of support may not give the desired result, because IMHO they are not earned income, and will make it harder to prove the child had earned income equal to at least half of their support.
But you just leave the amount of the room and board off the worksheet, just like you leave tuition paid by a scholarship off. It’s not credited to the parents or the child, just not considered at all.
The worksheet may have a very low total for this student as support. The cell phone, the insurance, summer housing or food (which might also be very low).
I pay for my daughter’s cell phone and it only costs me about $10/mo. If she were to get her own plan, it would cost a lot more but her support numbers on her worksheet don’t go up because she’s found a good deal to get her needs covered. OP’s son found a way to get room and board covered. Good for him.
Even if he is still a dependent, not much changes. (unless the parents aren’t eligible for the AOTC because of income being too high?). If still a dependent, the parents might also qualify for a $500 dependent credit.
According to the worksheet linked to earlier, in figuring the amount used for the person’s support both taxable and nontaxable income can be included. If the student’s services are required in exchange for the RA benefits, and if the school assigns a dollar value to those benefits, I think a strong argument can be made that the RA benefits should count as support for the student that was provided by the student.
The issue is not who provided more support. The issue is that for the refundable AOTC, the student’s earned income must be equal to or greater than half of their support. The RA benefits are not earned income, so would increase the denominator but not the numerator.
I respectfully disagree. According to the instructions for IRS Form 8863, which is used to claim education tax credits including the AOTC, earned income is defined, in part, as follows:
Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Earned income includes the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship grant.
(bolding added for emphasis)
As I stated in a previous post in this thread, in my opinion the RA benefits should be considered payments received for personal services actually performed. The fact that the benefits are provided not as wages or a cash payment but instead as payment-in-kind is irrelevant, as is the fact that the benefits are not taxed.
Don’t conflate a situation where a benefit is provided in exchange for personal services (room and board provided for doing the work of an RA) with a situation where there is no provision of personal services (like tuition paid by a scholarship that is based on merit or financial need).
The statutory definition of earned income as pertains to the refundable AOTC is identical (they both refer to IRC Sec 1(g)) to that used for Kiddie Tax. It does not include tax-free fringe benefits.
Our income is too high to claim AOTC on our joint return. But we can get $500 tax credit for claiming DS1 as a dependent.
Regarding the refundable credit if DS1 files as a non-dependent, I looked into what @allyphoe mentioned about earned income . In the instructions for form 8863, p.6, I see the definition of earned income as “payments received”. An earlier post mentioned that this “payment” can perhaps be interpreted as being in-kind.
IRC Sec. 1(g) refers to Sec. 911(d)(2) for the definition of “earned income,” which is defined by the section thusly:
The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.
Again, I will argue that the room and board benefits received by a student RA, which in the case of OP’s son have been assigned a dollar value by the school, are received as compensation for personal services actually rendered (or performed). The statutory language above does not exclude fringe benefits (whether taxable or not) or payment-in-kind under the definition of “earned income.” The RA benefits, provided a monetary value by the school, can be classified as amounts received as compensation for personal services actually rendered (in my opinion).
The following from the Code of Federal Regulations on in-kind income:
(https://www.ssa.gov/OP_Home/cfr20/416/416-1110.htm)
§ 416.1110. What is earned income.
Earned income may be in cash or in kind. We may include more of your earned income than you actually receive. We include more than you actually receive if amounts are withheld from earned income because of a garnishment or to pay a debt or other legal obligation, or to make any other payments. Earned income consists of the following types of payments:
[…]
(3) Wages paid in kind. Wages may also include the value of food, clothing, shelter, or other items provided instead of cash. We refer to this type of income as in-kind earned income.
** However, if you are a domestic or agricultural worker, the law requires us to treat your in-kind pay as unearned income. **
When I first posted this question, I wasn’t planning to wade into the intricacies of federal codes . The RA benefits are akin to the type of food and shelter benefits given to ,say, a live-in nanny as a required condition for work. Also no SS taxes are imposed on these RA benefits, as far as I know. So this is all consistent with what @allyphoe mentioned.
If I follow the line of reasoning from @BelknapPoint in i8863, I run into a self-referential issue on the definition of support (Item #2 after the definition of earned income). We are not providing room/board support for most of the year. Is the kid? But the “in-kind payment” earned by the kid is also the support provided by the university (the “other” party listed in Item 2). The document i8863 excludes scholarships as support. But this is not a scholarship. I don’t think I can count the benefits as both support and earned income. If I don’t count it as support, one could ask “how is the kid maintaining room/board?”
To make things even more complicated, I believe I have to include the RA benefits in Line 1 of the “Worksheet for determining Support” , because it asks for both taxable and nontaxable income. If those numbers turn out so that we cannot claim DS1 as a dependent, we don’t get $500 credit for TY 2019 and DS1 may not be eligible for AOTC refundable credit on his return. Of course, the value of his RA benefits far exceed any gain from AOTC. Just didn’t think it would get this complicated.