Oh the Places They'll Go ... While Staying on Your Tax Return One More Year!
College graduates have turned their tassels, and soon high school graduates will be marching to the strains of Pomp and Circumstance. Whether your graduate is preparing to enter the world of work, getting ready to join the military, planning to get more education, or simply hoping to have some free time, you might find yourself wondering what their new status means for your tax return.
The Tax Cuts and Jobs Act (TCJA) eliminated personal and dependent exemptions, but dependents still exist. There are two types of dependents: qualifying children and qualifying relatives. Taxpayers claiming either of these types of dependents need to consult the full list of qualifications.
A taxpayer’s children are probably "qualifying children" if they’re under 19 (or 24 if a full-time student) and they don’t provide over half of their own support. The IRS defines “full-time” as being enrolled full-time in school for part of at least five months. With college graduations being held in early May and high school ceremonies being held in late May or early June, the five-month standard is usually met even if the student does not continue their education in the fall.
The second major test, that the student not provide over half of their own support, is usually easily met also. Be aware that the IRS has specific things in mind when talking about support. They have a worksheet for determining support on their website, and it includes such things as food, clothing, medical expenses, rent, etc. Obviously, high school students who continue to college will have an easy time meeting this test. However, both high school and college graduates who permanently join the workforce this summer will need to fill out the support worksheet to see if they are still a dependent or not. We suspect most parents won’t get too upset at losing a dependent to the support test since it means their child has become self-sufficient!
A student who does not meet the qualifying child tests for dependency may still meet the requirements to be a qualifying relative. With no age restrictions or requirement to be a full-time student, the major test for qualifying relatives is income. In 2018, a qualifying relative could not have earned more than $4150; this number will probably be adjusted slightly for 2019.
If the student meets all of the tests to be a qualifying child or relative, they enable their parents to claim the new Other Dependent Credit. A part of the TCJA, this nonrefundable credit is worth up to $500 per qualifying child. Additionally, dependent students may meet the qualifications for their parents to claim either the American Opportunity Credit or the Lifetime Learning Credit. (Graduates who no longer qualify as dependents may benefit from these education credits too, but the rules are too complicated to get into in this post.) It’s important to note that graduate students may still qualify to be their parents’ dependent; do not confuse the IRS’s rules for dependency with those used by FAFSA.
Finally, along with college graduation comes the dreaded start of student loan payments. Depending on income levels (capped at $80,000 single and $160,000 MFJ), up to $2500 in interest paid on student loans is potentially deductible. To qualify for the deduction, the taxpayer must be legally responsible for the loan, so many parents benefit from this deduction. The student loan interest deduction can be taken whether the taxpayer itemizes or not.
Graduation is an exciting time, with graduates looking forward to endless possibilities. It’s nice to know that their parents can still look forward to the possibility of claiming dependent benefits one more time. If you have a new graduate and need more information on anything discussed here, please contact us!