Beware, your college student may not qualify for parents…
IRS computer software has become extremely sophisticated in recent years enabling cross checking of social security numbers and comparing information reported on tax returns filed by social security numbers. Although full time undergraduate students under the age of 24 have usually been considered qualified dependents of their parents, increasing costs of higher education and living expenses, college students are finding it harder to attend college full time without working more part time hours, and this additional income may trigger IRS computers to raise a questions as to whether or not the parents met the 50% support test to enable them to take the tax credit for other dependents on their personal income tax returns. And don’t think that it is a “given” that the parents provide half of their college student’s support, this needs to be calculated. Now keep in mind that this does not mean that a child in college can’t earn extra money and save this money to use in the future; they just can’t use it pay half their support. In order to qualify for the Other Dependent Credit (ODC), the IRS prescribes certain tests and calculations that need to be performed in order to be satisfied that the PARENT claiming the ODC has met the 50% support test (in addition to the other rules such as residing with parents other than temporary absences) . To calculate the support test two factors are involved. Probably the most important is to know the total cost of the student’s tuition, books, on campus living, extracurricular activities, food, clothing, transportation, medical, dental and the FAIR MARKET VALUE of lodging at home, personal hygiene products, etc. Then one needs to determine how much of these expenses were paid by the student and the parents. The cost of living and attending colleges and universities has increased dramatically over the past two decades. The cost of obtaining an advanced degree is becoming extremely expensive in recent years. Tuition and fees vary from college to college. Among ranked National Universities, the average cost of tuition and fees for the 2019–2020 school year was $41,426 at private colleges, $11,260 for state residents at public colleges and $27,120 for out-of-state students at state schools, according to data reported to U.S. News in an annual survey. When it comes to costs, the average tuition and fees to attend an in-state public college is a third of the average sticker price charged at a private institution. This is your starting point in determining the cost of support. Along with the general cost of living, tuitional costs vary based on the location. I believe that the best advice is for parents of children who are enrolled full time in higher education institutions is to maintain good records. Keep careful track of tuition payments, the cost of books, extracurricular activities, clothing purchases, meals eaten on campus as well as those provided at home for the student dependent, transportation both to and from school as well as school activities. If the student commutes and requires an automobile, keep track of the annual cost of the vehicle and other transportation costs. Although the cost of on or off campus residence is easier to determine, probably one of the most difficult expense items is determining the cost of maintaining the residence that is available to the student while not attending school, or if they are commuting. The IRS refers to Fair Rental Value. That may require that you either keep track of the cost of maintaining your home, and apportioning the amount of square footage used by the student child, including your mortgage payments, taxes and insurance. Alternatively, you may want to determine what it would cost to rent a residence. Let’s look at an example. First determine what the fair market value of a residence for the child would be (assuming they live with you). Say that is $14,000 yearly. Then add the cost of utilities and insurance apportioned to the child when it is actually used. Then add the other costs mentioned (including the actual cost of either an on or off campus residence, and let’s assume that is another $13,000, which when all is tabulated is $27,000 per year. Add to that the cost of tuition, books, lab fees, etc. which may be another $25,000. That brings you to $52,000, and 50% is $26,000. So, if the student earns $15,000 after taxes and you make up the difference, then it is a no brainer. But what if the costs are only $14,000 and the student earns a net (after tax) of $15,000, Then it is necessary to determine if the parents pay 50% of the cost. As you see it gets complicated. So when you do your tax return, or if you go to a paid preparer who asks you the support question as part of their due diligence requirement, be prepared by keeping good records of costs, expenses and who pays what. Should the IRS (or state) ever challenge you on the support issue, and you cannot satisfy the requirement, or if you ignore the letter, you may face losing the credit for that year and future years as well, not to mention that they could go back three years. A word of caution on the AMERICAN OPPORTUNITY TAX CREDIT. This can only be taken for 4 years. After that, there is possibly the Lifetime Learning Credit. But don’t get caught short by claiming the AOTC for more than 4 years, as again not only will you need to pay it back, but face penalties as well.