This post is from April, 2020. If you are looking for information about the March 2021 stimulus payments, please go here.
Parents of college students have likely heard that those students– if claimed as dependents on their parents’ 2019 taxes– are not eligible for the $1,200 stimulus payment. These payments are an advance refundable credit on 2020 taxes. This means that the payment is actually a tax credit on your 2020 taxes, which you get even if you don’t have a tax liability (that’s the “refundable” portion). One caveat is, you don’t get it if you are a dependent on someone else’s return.
Which begs the question, Can you simply not claim your college student as a dependent on your 2019 tax return? The answer is yes, you may be able do that, but you should understand the pros and cons before deciding to do so– and of course, have your tax preparer run the numbers to determine whether or not it makes sense. Note that your student needs to be able to make a bona fide case that they were independent, which includes providing at least 50% of their own support.
First, what are the benefits of claiming your student as a dependent? Taxpaying parents get a $500 tax credit per over-17 full-time student dependent. In addition, parents can only claim the American Opportunity Tax Credit (up to $2,500) if they claim the student as a dependent on their tax return. Finally, a few states offer state tax benefits for dependents; you can find out if your state offers one here. The big number here is the AOTC. For AOTC-eligible families, claiming the student on their tax return nets a $3,000 tax benefit between the dependent and AOTC credits. For non-AOTC-eligible families, claiming the student only saves $500. (This assumes you are in a state without a state tax benefit.) Remember the income phaseout for the AOTC is AGI of $80,000 for single filers or $160,000 for married filing joint.
Prior to the coronavirus, the primary benefit to not claiming a student as a dependent was that if the family was not eligible for the AOTC, the student– who likely would be below the income threshold– could file their own tax return and receive the refundable portion of the AOTC ($1,000). This puts the family ahead by $500 each year, for a total of $2,000 over the course of four years of college. Details here. Note the rules for full-time students claiming the refundable portion of the AOTC are slightly more restrictive than simply being independent; they must have earned income equal to at least half of their support needs.
The stimulus payments tilt the scale even further towards not claiming a student for students who might be eligible to file independent. One of the primary requirements to receive the stimulus payment is not being claimed as a dependent on someone else’s tax return. So now the independent student gets not only $1,000 for the AOTC, but also $1,200 from the stimulus. Where the parents would have received only a $500 dependent tax credit, the student (and ostensibly his family) would receive $2,200 between the AOTC and the stimulus payment. This is of course a huge tilt in favor of not claiming the student on one’s tax return– unless the parents are eligible for the AOTC, in which case the $3.000 in total tax benefits is almost 50% more.
There is one exception to this: A single parent filing head of household for whom the student is the only dependent would give up head of household status if the student is not claimed as a dependent on either their own or the student’s other parent’s tax return. Head of household filing status is generally more beneficial than the stimulus payment so if you don’t have another qualifying dependent, you’re probably best off keeping your student as a dependent.
To recap: If you have not filed your 2019 taxes and you are not eligible for the AOTC or filing head of household with no other dependents, it might be beneficial not to claim your student as a dependent on your tax return. Note that payments are scheduled to begin around April 13 and will be based on the most recently filed tax return, 2018 or 2019. And since the stimulus payment is actually a 2020 tax credit, you might get it next year if your students file independent in 2020.
Here are some other common questions on this topic:
- Q: Can my student still be covered on my health insurance if I don’t claim them as my dependent on my taxes?
- A: Yes! The Affordable Care Act allows parents to keep their children on their health insurance up to age 26, regardless of whether or not they’re claimed as a dependent for tax purposes.
- Q: Does this impact my FAFSA?
- A: The FAFSA only cares that your student is living with and supported by you. It does not care about your student’s tax status. This has long been the case; many divorced parents have one parent claiming the student for tax purposes while the other files the FAFSA. To the extent that the parent is giving up a tax credit, though, this will have a negligible (approx. $250) benefit in the EFC calculation since taxes paid are subtracted from income.
- Q: Can I still claim Head of Household status if I don’t claim my student?
- A: This is a little more complicated. If you have other dependents, including for example your parents, then yes. Generally the parent must claim at least one dependent, or have released the right to claim the dependent to the other parent. If your only student is your only dependent, then filing Head of Household is most likely more beneficial than the stimulus payment.
As always, this is general guidance that should be reviewed with your tax preparer prior to making any changes.
There are 17 comments
Thank you for the information on the stimulus checks as it relates to dependent college students. I am the parent to a 21 year old college student. I claimed HOH and my son as my dependent on my 2019 taxes. If he claims himself for 2020, will he be eligible for the full 1200 when he files next year?
There appears to be some back-and-forth on this topic and at this point I don’t want to give a hard, fast yes or no answer. On the one hand there is discussion about whether to change the dependent definition for purposes of this tax credit to include college students, seeing as how they’re living in our homes and eating our food and using our electricity and hot water just like their younger siblings. On the other hand, there’s also discussion– given the large number of people this impacts– as to whether an individual who qualifies as a dependent– i.e., receives at least half of their support from parents– is allowed to file their own return. In the past, these numbers have been small since the benefits to doing so were negligible. However, with approximately 16 million dependent college students out there, suddenly we’re talking about big numbers. All in all, I’d say wait and see. And remember that unless you have another dependent, you’re better off filing HOH and keeping your son as your dependent.
Does the student need to have earned income to claim the AOTC?
They need to be able to file a tax return and not be a dependent on someone else’s. Without earned income, it would be difficult to make the case that they’re not someone’s dependent. Historically this hasn’t been something that’s been looked at too closely; however, with the stimulus payments this may get more scrutiny going forward. The AOTC is 40% refundable, meaning that you can get a $1,000 tax credit even without a tax liability.
American Opportunity Tax Credit – Exception for Under Age 24 Taxpayers
Self-supporting taxpayers claiming the AOTC for themselves, will not qualify for the credit if they fall under Rule 1, or 2 or 3.
Rule 1: Taxpayer is under age 18.
Rule 2: Taxpayer is age 18 and earned income (employee or self-employed) is less than onehalf of total support.
Rule 3: Taxpayer is over age 18 and under age 24 AND is a full-time student AND earned income is less than 50% of total support AND has at least one living parent AND is using a filing status other than a joint return with a spouse.
Thank you, will update the post with this info!
Simply NOT claiming an eligible dependent may result in him/her receiving a stimulus check. However, it does not appear to be kosher. The IRS asks if you “can be” claimed as a dependent, not if you in fact were. So NOT checking that box is probably improper. My opinion. Your thoughts?
You need to be able to make a bona fide case that the student was not a dependent i.e. you provided less than 50% of their support. According to multiple CPAs with whom I’ve discussed this, it’s a somewhat gray area for students insofar as it’s only the recent tax law changes that have made it advantageous to not claim your student as a dependent, e.g. is a student loan self-support? Previously when you got an exemption for your dependent even if they were college age, the exemption was worth enough that parents wanted to keep their kids as dependents. Not being a CPA myself, my recommendation is that you check with your CPA before making changes to how you file your taxes.
I appreciate the quick response. I spent several hours on this last night (coming across your blog, as well), and it does appear that this is, as you say, a gray area. I, too, was wondering about student loans. I imagine if the loan is in the student’s name, and he will someday have to pay it back, that should qualify as self-support. But what if he’s paying tuition and mom and dad are paying room and board. What is meant by “support”? These are the questions that CPA’s will need to answer. Thanks again!
We’re diligently trying to figure this out ourselves, in part because the IRS processed my son’s 2018 tax return incorrectly and called him independent. We spent hours on the phone trying to sort it out because the instructions they provided to fix it were incorrect due to the new tax forms in 2018. We finally sent a letter explaining the situation, very clearly stating he was a dependent on our return and providing copies of his and our returns showing we had claimed him and he had checked the box on his indicating he was someone’s dependent. Never heard anything back until a month ago when my son came to me wondering why $1200 just got deposited into his bank account…
Isn’t possession nine-tenths of the law? 🙂
Not when the IRS is involved!! And I’ve heard conflicting information about clawbacks in this case.
The AOTC maxes out at $2500, not $4k. You need $4k in costs to get that. 100% credit for the first $2k & 25% for the next $2k. A typical parent would gain $3k in credits claiming their student. A single parent with no younger children would also be sacrificing HOH status if they let their child claim themselves. This alone, could swing things thousands.
Doh, I think I had too many thoughts in my head when writing that. Thanks for catching my error on the AOTC. Editing the post now…
Last year we had our student file that type of tax form that was for non-filers. I put her into our taxes completely with school and it was only saving us the 500 total so it made sense for her to do this since it was a gain of of 1300 overall. This year however with the changes of the stimulas happening it financially makes sense, especially since her tuition expenses out shined her scholarships and grants, to claim her again as a dependant. My question is this: I haven’t found anything that says that this is not legal and that we have to claim them each year to continue to do so while in college?
My CPA says this isn’t an issue– the main thing is whether the student can claim themselves independent, not whether you can claim them as a dependent. I can foresee this getting a little bit sticky where there’s the potential to claim a stimulus payment more than once since these can be based on 2019/2020/2021 taxes. However, you claiming them again isn’t the issue; the bigger issue is whether they’re actually eligible to claim themselves. And note that if you’re not claiming them, you’re also not claiming the AOTC which is worth more than the stimulus– assuming some portion of the stimulus is 2020 and some 2021.
Ya we couldn’t get but 200 for the AOTC her first year cuz most was paid for by grants and scholarships. She could claim herself last year as independant due to all the extra help for her financial aid that covered her living expenses so she didn’t have to work during school. She will get the stimulas for this round into her account because we haven’t filed yet. The only reason we were able to make that decision last year is because we as a country got an extention so we definitely knowing we would have to pay in took advantage of that!