Sending Junior Off To College? Here's How It Affects Your Taxes
Is your child heading off to college this year? Along with the myriad of changes and adjustments both parent and child will have to make in this adventurous new time, there are some financial considerations to be made. One of them is how your child leaving home affects your taxes. Here is a handy guide to the three main tax implications you and your young adult face.
Claiming the Dependency
The good news for parents of college-aged children is that you likely can still claim the child as a dependent even though they are over 18 and/or living on campus. If they are considered a full-time student (by the college's definition) for at least any 5 months of the year and you are paying the majority of their living expenses, you can claim them as a dependent child until they reach 24 years old. They can even work a part-time job and still be claimed.
Dependency exemptions are important for parents' taxes both to reduce your tax bill and to qualify for any education credits. More on education credits later.
Filing as a Dependent
The only tax downside to claiming your child as a dependent is that it may affect their filing requirements and amount due. If your child earned more than $6,300 (in 2015) from a job, they are probably required to begin filing their own taxes.
For employee wages, the filing threshold for dependents is lower than for non-dependents. This may even result in the young person owing a small amount of tax because the parent has claimed the $4,000 (in 2015) dependent exemption.
Education Tax Credits
Remember those education credits mentioned earlier? Here is what you need to know.
There are three types of tax benefits for the amount you pay to the school in tuition (and sometimes books or supplies) for yourself or your dependent. The most valuable is the American Opportunity Credit, which can be refunded to you even if you owe no taxes. This credit is only available for the first 4 years of undergraduate education and must be claimed in the year that the expenses occurred. You can claim it on Form 8863.
For graduate students or students who have claimed the AOC for 4 years, you may claim the Lifetime Learning Credit. While this tax credit cannot be refunded to you if your tax bill is zero, it has no limit on how many years you can claim it. It is claimed on the same form as above.
Finally, if you do not qualify to claim either credit, you can still reduce your taxable income by the amount of qualified education expenses by claiming the Tuition and Fees Deduction. This option may be best for high earners whose income is too high (over $62,000 for single taxpayer in 2015) to claim the credits. This deduction is available on your Form 1040.
The Bottom Line
So, what does this all mean for you and your student? Your tax bill will be made smaller by being able to continue to claim your child on your taxes, even though theirs might be a little higher than it would otherwise have been. But if you can claim the valuable education tax credits, the net benefit to the entire family will be increased. If you are unsure about how to file for any of these or whether you can still claim that dependency, it may be best to work with a professional tax preparer with experience in student taxes. As a result, your whole family can enjoy the college experience with less worry.
If you need help preparing or filing your taxes, contact a company like Tri Check Inc.