College Students as Dependents by Karla Hopkins

College students combine many sources of funds to pay for their education, including personal savings, family savings, income from jobs, scholarships, and student loans. As the percentage of funds from the student's sources increases, parents face the risk of losing the student as a dependent on their tax return. Not only could they lose the exemption but they could also lose valuable tax benefits like the Education Credits and Tuition Deductions.

College costs continue to increase at a rate greater than inflation. Many parents began saving early for their child's education and many of these students are now entering college. The tax implications of withdrawals from education savings plans should always be considered. In addition, given the current economic times, students are borrowing more money for higher education than ever before.

One of the requirements to claim a child as a dependent on your tax return is the support test. The student cannot have provided more than one-half of his own support. To determine whether a student provided more than one-half of his support, the amount provided by the student must be compared with the total amount of support the student received from all sources.

The support test depends on two factors: the source of funds and the total expenses paid. Support includes food, shelter, clothing, medical and dental care, education and other similar items. Typical expenses for a college student might include tuition and fees, lodging and meals, transportation, clothing and personal expenses. One important item that is not included in the support calculation is scholarships. These are not counted in determining total sources of funds. Money that had been saved in a Uniform Gift to Minors Act account are considered provided by the STUDENT, not the parent. Money saved in a 529 plan or a Coverdell Education Savings Account has not yet been classified by the IRS as the student or the parent's and could make a significant difference each year in the dependency test. We await legislation that will clarify this.

When a student obtains a loan to help defray the costs of education and the student is obligated to repay that loan, the amount of the loan is considered support provided by the STUDENT, not the parent. This, in particular, may make it difficult for a parent to meet the support test.

The tax benefits of the parents claiming the student as a dependent usually warrant planning the source of funds in an effort to preserve the dependency exemption and educational credits. However, a high income family should also analyze who claims the dependency exemption in terms of potential phase outs, tax credits, alternative minimum tax, and other nontax implications.

Whether or not a college student qualifies as a dependent affects both the parents' and student's tax returns. Items such as the Exemption deduction, Hope Scholarship, American Opportunity or Lifetime Learning Credit, and Tuition and Fees Deduction depend on the status of the student as a dependent. The implications of a student no longer qualifying as a dependent extend beyond the parents' and student's tax returns to include benefits provided through the parents' employer and federal student aid calculations. Planning for the annual calculation can be complex but is wise.