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Discussion:Dependent Student/Support Test/Ticked Client

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Discussion Forum Index --> Basic Tax Questions --> Dependent Student/Support Test/Ticked Client


Discussion Forum Index --> Tax Questions --> Dependent Student/Support Test/Ticked Client

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Question from last year (2013)

EatonCPA (talk|edits) said:

3 April 2013
I'll preface this with the fact I spent yesterday searching the yellow box on this topic and did a lot of reading before contacting my client on this. The client is now hyper ticked off judging by the voicemails and email I got last night so before I go pushing the button that I know will mean this client walks, I'd like to be sure I'm correct.

H/W own a business (dog kennels/boarding) that files as a C Corp - so no pass-through income. She takes a nominal W-2 of a bit under $12,000 a year and that is in fact all the money she gets out of this business. He has no income. They have 3 kids, one still in HS and the other two in college. They've been clients for years and we've always claimed all 3 kids as dependents based on the facts and circumstances as presented. This of course is allowing the couple to get a sizable EIC refund every year.

I get an email from H yesterday that he's trying to prepare a return for the oldest son who works a PT job on campus and Turbo Tax is showing the kid should owe money, would we mind taking a look. These have been long-time clients, business and personal so sure, I'll take a quick look at kid's W-2. They send over the W-2 along with the 1098-T information he's putting in and I realize what is triggering the problem - $21K in scholarships, $12K in tuition. I call mom and make sure son isn't actually getting $9K in cash for excess scholarship and grant money and she tells me no, it all is going to the school to pay room and board and that in fact not only does he not get any of that money, he has to take out loans every session in addition to cover some other costs as well. So now I get to thinking .. if the scholarship is paying for most all of his tuition and room and board and he has $5k in W-2 income AND he takes out his own loans, what, exactly, are his parents paying for his support? Especially on less than $12K in income? I send an email back to the parents explaining my new line of thinking and asking them questions about how much son took out in loans and dollar figures of what they are paying for his support. I explain to them that while it was only scholarship money in play, everything was kosher but now that there are earnings/loan proceeds, he may flunk the support test and that would mean they would have to repay some EIC monies on an amended return. The threshold I defined for them was they needed to have actual support costs greater than his W-2 income + loan proceeds. They fire back that they aren't going to bother filing for him then (even though he'd get $400 in withholding back) and he's graduating this summer anyway so it's a moot point. Mom leaves an angry message on the phone that they aren't changing anything on a return and as long as he is in college, she is claiming him.

So ... am I right? Has the existence of this W-2 income and loans (in his name - his responsibility, I confirmed that) blown their right to claim him as a dependent?

EatonCPA (talk|edits) said:

3 April 2013
Let me re-phrase that final questions - has the existence of this income *potentially* blown their right to claim him? Because I have yet to be given any numbers in terms of loans taken out or monies paid by the parents for expenses.

Ckenefick (talk|edits) said:

3 April 2013
Look at the lengthy recent post on this issue, which includes a linked TaxAdviser article.

"Shoebox" (talk|edits) said:

3 April 2013
I believe the allowable earned income credit is the same for 2 or 3 children. "Losing" this student as a dependent should not shrink the EIC (or total refund). This emotionally charged exchange you are having with your client is one of the reasons that I am dumping my EIC clients after this year.

If you input the 1098-T into the parent's return the "excess" will need to be added to the child's line 7 income anyway. Room and board is not a qualifying expense for AOC, thus generating excess scholarship as line 7 "income" to student (regardless of whose return the 1098-T is input in).

Just a few thoughts....

EZTAX (talk|edits) said:

3 April 2013
I think, but not well at this time of year :), that EIC is fine but cannot claim as an exemption. Not sure that this won't work out better in the long run.

Agent62 (talk|edits) said:

3 April 2013
Although,the child will have to report scholarships or portions of them used for room & board as income.Section 152

[A portion of this post that was copied from this JOA article has been removed because posting it violates TaxAlmanac's copyright policies.]

[Another portion of this post was removed for violating TaxAlmanac's copyright policies because it was found in a copyrighted article available on numerous non-public-domain consumer help sites.]

The" EIC is not the same for 2 or 3 children" and EZTAX is correct that there is no support test for the EIC.

New responses in 2014

DEMODN (talk|edits) said:

11 March 2014
If they claim the student as a dependent, you should have had his 1098-T form before completing their return, as the education credit goes with the dependency. Also, as stated above, room and board are not qualified expenses and he therefore has taxable scholarships. Also, the support test does not apply for EIC purposes. The student would remain qualified for EIC, even if not qualified as a dependent.

Doug M (talk|edits) said:

12 March 2014
It sounds to me like the refundable portion (if any) of the AOC is same for son as for parents. No change there.

Although,the child will have to report scholarships or portions of them used for room & board as income.Section 152

This should be a non-issue. Kid gets first $9,800 tax free. If on parents return, should not generate any federal taxable income on that return. Non-issue again.

As to the EIC remarks, not sure.

Doug M (talk|edits) said:

12 March 2014
Isn't there a ruling, that if parents collectively do not provide more than half the support of the minor child, they cannot take EIC?

As in the examples where grandparent provides more than half the support, EIC has to be taken by grandparent?

EZTAX (talk|edits) said:

12 March 2014
Doug - regarding your first comment - Kid only gets refundable portion if only if they had earned income equal to over 1/2 their support (for those that have been here for awhile this was a doozy of a long discussion when AOC first came out and we were trying to figure it out).

Regarding your second comment - no, no support requirement. There were old rules that had the EIC going only to the higher income taxpayer but they are history. Now tie breaker rules only come into play if there is a disagreement on who gets the credit. See chart in Pub 17 page 233 for and easy primer.

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