Your child could be eligible to be claimed as a dependent on a parent’s tax return even if your child is enrolled in graduate school. This article will describe the dependency rules defined by the IRS to determine if this is an option to reduce your tax liability.
Who is considered a dependent on taxes?
For federal income tax purposes, a student must be under the age of 19 or under the age of 24 at the end of the calendar year, as well as have been enrolled full-time in school for at least five months of the year.
Are graduate students considered dependents for tax purposes?
If your child is enrolled in full-time graduate school for either Fall Semester (August – December) or Spring Semester (January – May), they could be considered a dependent.
The child cannot be an independent student in order to qualify as a dependent for federal student aid. An independent student is automatically a graduate student. A student is not considered independent if they are
- The student of 24 as of December 31st of the award year. Basically, between January 1st – December 31st. they must not be aged 24 at anytime.
- Your child is married.
- Your child has any dependents, such as a child
- Your child is a veteran or on active duty in the military
In addition, the parent must have contributed more than half of the child’s support if the student is not an independent student.
Despite any brief absences for illness, education, business, vacation, or military service, the child must have resided with the taxpayer for more than half of the year. The student also cannot have supported itself more than 50% of the time.
Remember, the student must indicate on their taxes that someone else is claiming them as a dependent.
What if they live in a dorm or off-campus apartment?
Your child is considered living with you, even if not in your house, if the reason for their temporary absence was for education. This can be tricky. Assume your child graduated from undergrad at age 21 and moved out and is living on their own. He/she decides to return to graduate school while still working full-time, they would not be considered a dependent because they are living on their own and not with you and are supporting themselves, despite the occasional check you send for support.
What if they live with another person?
Another person can claim the person as a dependent on their taxes as a qualifying relative. The Internal Revenue Service uses a special phrase with a highly defined meaning when referring to qualifying relatives (IRS). A taxpayer may include an eligible relative as a dependent and claim any tax benefits that would result from including the relative in the household. This person can claim your student on their taxes if the following guidelines are followed.
- Cannot be claimed as a dependent on another person’s taxes
- Must either live in the household all year OR be related to the taxpayer as a child, sibling, parent, grandparent, niece or nephew, aunt or uncle, certain in-laws, or certain step-relatives
This could be used as incentive to allow a person to live with another person who is closer to the campus. For example, a graduate student’s parents lives in Michigan but wants to go to school in Georgia. To help with housing expenses, you allow the qualifying relative to claim the student on their income taxes in exchange for free or reduced housing. If you do this, you will not be able to claim the student on your taxes even if they live with you for an extended period of time.
What about Lifetime Learning Credits or American Opportunity Credits?
The American Opportunity Tax Credits (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. Because graduate school is past the first four years of higher education, no one can claim AOTC.
The Lifetime Learning Credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.
To claim the LLC, you must meet all three of the following:
- You, your dependent or a third party pay qualified education expenses for higher education.
- You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse or a dependent you listed on your tax return.
There are income limits for LLC. As of 2022, you cannot claim the credit if your MAGI is $69,000 or more ($138,000 or more if you file a joint return). Only one person can claim a LLC (parent or the student).
What if my child is working a part-time job?
A dependent college student must not provide more than half of their own support. Support includes expenses such as food, clothing, housing, out of pocket medical expenses, and education. If their part-time job is enough to support half of their expenses, you cannot claim them on your taxes.
You don’t need to worry about gross income if you’re claiming the student as a dependent child. If using qualifying relative status, the gross income cannot exceed the value of an exemption, which as of 2022 was $4,300, in order to satisfy the requirements for being a qualifying relative.
What about student loans and scholarships?
Nontaxable scholarships do not count towards dependency taxes as these funds are not considered income.
Student loans do count towards support (but not income) by the person responsible for the loan repayment. A graduate/professional student can borrow up to $20,500 in Direct Unsubsidized Loans each academic year. If the cost of tuition is $8,500 for the year, that leaves $12,000 for the year for expenses. If that is enough money to live off of, you will not be able to claim that person as a dependent.
If a student adds a private student loan, this decreases the chances of you being able to claim them as a dependent.
A loan is considered support from a parent if at least one parent co-signs the loan.
How do I determine the best way to approach dependency at tax time?
If you are unsure, it is best to consult a tax professional. At the minimum you could compare the tax returns with and without the student to find the best way to reduce tax liability.
If you need further assistance in exploring graduate degree programs, feel free to reach out and schedule a free consultation to explore your options.
