As college-bound students prepare to leave home each fall, parents often ask us if they should continue to claim their now-adult child as a dependent or allow them to file their own return and claim themselves.
The rules for this are confusing, which is why dependency questions come up so frequently. My standard answer is that it depends, and I suggest they speak with their tax preparer. While each family is unique, here’s a quick analysis to help parents make the right decision for their family.
Let’s address the simplest issue first. If your annual income is high, and for this purpose, high means more than $400,000 if you are married filing jointly or $200,000 for all other filing statuses, the write-offs for having children or other dependents do not apply to you.
Sorry. Your child can work and claim themselves and any education credits on their return.
Next, it is important to remember that there are generally two types of tax breaks.
A deduction reduces your income and, therefore, reduces your tax. A credit offsets the taxes due; if the credit exceeds the tax you owe and is refundable, you can receive a refund from the credit. If it is nonrefundable, the credit will only reduce your balance to zero, and you cannot receive a refund from the credit.
The Tax Cuts and Jobs Act (TCJA) of 2018 eliminated the $4,050 exemption deduction per child and, in exchange, increased the child tax credit from $1,000 to $2,000 per child. Unfortunately, the credit has not been adjusted for inflation, and it is still $2,000 per child for 2024.
So, if your tax is $4,000, and you have a credit for $2,000 each for two children, your revised tax bill will be reduced to zero. However, only $1,700 of the child tax credit is refundable. Thus, if your tax was only $2,000 for the same two children, you would receive a refund of only $1,700 and not $2,000.
The credit may go up in the future. It was temporarily increased to $3,600 for children up to age 5 and $3,000 for children ages 6 to 17 in 2021 as part of the American Rescue Plan Act. The US Census Bureau found the credit lifted 2.9 million children out of poverty temporarily. We’ll see if Congress and the president increase the credit again next year.
Another surprising fact about the child tax credit is that it doesn’t apply to children over 16.
I am not sure why Congress did this. As any parent (or auntie) knows, the costs for a 17-year-old, including prom, graduation, grad night, college application fees, and, for more fortunate kids, a car, is a significant burden to many families. However, the only credit available for your 17-year-old (and older) is a $500 family tax credit.
So, is your college-age child still a dependent?
There are two types of adult dependents: qualified child and other dependent. In general, all dependents must be U.S. citizens or nationals or residents of the U.S., Canada or Mexico, and only one person can claim the dependency exemption.
To be a qualifying child, they must meet other tests: age, relationship, residency, support and they must not file as married filing a joint return unless they are filing to obtain a refund.
Generally, if you provided more than half your child’s support, and they are a full-time student for five months of the year, under age 25, and unmarried, you can claim a $500 credit. They don’t have to live with you (residency test) if they were away at school.
If they did not meet the criteria above, you might be able to claim them under the qualifying relative tests. If you provided more than half of their support, they were a close relative or lived with you the entire year, and their income was $5,050 or less, you might be able to claim them as another dependent instead and still take the $500 credit.
If your adult child does not qualify as your dependent, and they claim themselves, they can earn up to $14,600 and not pay federal income taxes.
In addition to the dependency credit, there are educational credits. To claim the credits, your modified adjusted gross income (MAGI) must be $90,000 or less ($180,000 or less if you file married filing jointly), and your child must be your dependent. If your income exceeds this or you cannot claim them as a dependent, allow your child to take the educational credits.
There are two types of credits:
The American Opportunity Tax Credit (AOC) is for students pursuing the first four years of higher education, and the maximum credit is $2,500 based on percentages that require some math. For instance, if you paid $4,000 or more in qualified expenses (whether it is $4,000 or $40,000), your credit will be $2,500. Only 40% of the credit (up to $1,000) is refundable.
The requirements for the AOC are strict. If your child does not qualify for the AOC because they are only attending school part-time, dropped out for a time, are not pursuing a degree, already have a four-year degree, or have committed a felony, the good news is they can still qualify for the Lifetime Learning Credit (LLC).
The maximum LLC credit you can claim is 20% of up to $10,000 in eligible costs for a maximum credit of $2,000. Unlike the AOC, this credit is not refundable. As you can see, the difference between the two credits is $500.
These are just generalized rules. If you decide to claim your adult child and the related tax credits, you should discuss the specifics of your situation with your tax professional so they can help you file your returns correctly.
If you own a business, there is another way to help your child with their educational expenses and to be able to write off supporting them. Hire them to work for you! Talk to your CPA about the tax benefits of hiring your children, even if they are minors.
As you can see, the deductions and credits available for having kids only modestly offsets the expenses of raising them and barely makes a dent in the cost of higher education.
If your adult child is considering claiming themselves on their taxes, it is probably not worth arguing with them about it. They’ll feel a sense of independence being able to claim themselves, and the amount of financial aid and tax credits available might be greater.
Michelle C. Herting is a CPA, accredited in business valuations, and an accredited estate planner specializing in succession planning and estate, gift, and trust taxes.
