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.