Tax Planning for Graduating College Senior headed to Graduate School

[ClassicRockerDad]

You cannot claim her if she does not live with you. That is what you want. So just make sure she doesn’t live with you. Since she in fact lives in her own apartment, just make sure she gets a drivers license, etc. so that her documentation is in order.

Go to the IRS website and read the rules very carefully about when a person can claim themselves as an exemption and can get the full standard deduction. The 50% test is just one prong of the test. I think I am right about this, but please confirm it for yourself.

@al2simon This is actually tremendously helpful.

The relevant facts are

• She will not be a full-time student Spring 2017. She only needs a few credits to graduate - more than half time, but less than full-time. If her graduate program starts in September, she will not have been a full-time student for part of 5 months, so will not be considered a full-time student for the age test, whereas if her program starts on Aug 31, she will be a full-time student
• She must live with us for less than 1/2 the year. Since she surely won’t live with us from Aug 1 on, she can decide April 1 whether to change her residency from Mass to the state where her undergraduate school is to get 7 months of not living with us. If ends up going to UMASS, than she can keep her MASS residency, but UMASS starts in September and she won’t be considered a full-time student because she won’t have 5 months. If she goes to a school that starts in August, she can change her residency on April 1 and will still have at least 7 months of not living with us.

So we can surely arrange things to be unable to claim her.

Now for the kiddie tax, from Thomson-Reuters
https://tax.thomsonreuters.com/media-resources/news-media-resources/checkpoint-news/daily-newsstand/strategies-for-dealing-with-the-kiddie-tax-part-i/

The kiddie tax rules apply to the income of any child who:

1. (a) is under age 18, regardless of whether his earned income equals more than one-half of his support; or (b) turns 18, or if a full-time student turns 19-23, before the end of the applicable year, and the child’s earned income for the tax year doesn’t exceed one-half of his support; (Code Sec. 1(g)(2)(A))

Her earned income must exceed one-half of her support for the kiddie tax to not-apply. This is very bad. Actually, it’s quite possible that even if she goes to a school that starts in September 2017, which would save her from the kiddie tax on a fellowship in 2017, she will surely be a full-time student in 2018 and still only be 23.

So for example in 2018, (assuming today’s tax rate, though I suspect it will go down), the kiddie tax on a $30,000 stipend would be (39.6%-15%)*3000= $7380.

Ouch!

So @al2simon, you read is incredibly insightful and unfortunately incredibly correct. Thank you! She should try to get a TA or RA instead of a fellowship until she’s 24.

We could still give her enough money in 2016 so that she could pass the support test for the purpose of an exemption. That test counts her bank balance on Jan 1 as her own money.