Should I File as an Independent in Order to Claim the American Opportunity Tax Credit?

Question

My financial circumstances:

• I am a full-time undergraduate student employed by the university through the federal work-study program.
• I expect my total income for the year of 2016 to be a little over $800.
• Over $13,000 of my academic expenses is paid for by "free" money (federal grants, state grants, and scholarships)
• A federal student loan (subsidized) in the amount of $3,500.
• A federal student loan (unsubsidized) in the amount of $2,000.
• Close to $1,000 in out of pocket expenses for books and other fees for the Fall semester.

I have never filed my own taxes, but I have thought about doing so for 2017. My mom and I are currently in disagreement about whether she should claim me as a dependent on her next tax return. Essentially, she is afraid of losing a significant chunk of the large refund she gets by claiming me. I am trying to convince her that I would be better off filing taxes even with my miniscule income, since I found out that I can claim educational expenses (such as my subsidized loan) on my taxes in order to receive money through the American Opportunity Tax Credit. What should I do?

Answer 1

If she claims you as a dependant she may be able to claim your education expenses also and depending on tax bracket (hers and yours) they may be worth more to her than they are to you.

Having her claim you may also affect your eligibility for financial aid however, if she has been claiming you so far with no negative effect on your eligibility then that may not matter next year either.

Answer 2

First, you need to see if you actually qualify as a dependent under IRS rules; in short:

• You must be a citizen or legal resident.
• No one else is claiming you as a dependent.
• You are not filing a joint tax return.
• You are a legal child/offspring of the person claiming you as a dependent.
• You must be no older than 19 (24 if a full-time student), or permanently disabled.
• You must live with the claimant for at least half the year.
• You must be financially supported by the claimant (any jobs you have cannot provide more than half your total support).

While there may be exceptions to the cohabitation rule, I am not sure what those could be. The takeaway is that if your parent is wishing to claim you as a dependent, they must be responsible for supporting the majority of your living expenses (e.g. food and shelter).

If this is the case, then the next question is to look at how the impact of the exemptions play out. In your situation, I would guess that your mother is correct: your taxable income is likely to be so low that if you do not take an exemption for yourself, you probably would still have zero or minimal tax liability; but if you mother claims you as a dependent, she will be able to take a deduction.

In the case of your grants and loans, the loans should not be taxable income since these need to be repaid (presumably, with future earnings). Federal grants may be taxable--basically, the portion of the grant that is used solely for paying educational expenses toward a specific degree (tuition and books) is non-taxable, but the remainder may be subject to tax.

As for tax credits, you would need to see how much you would get and how they would apply to you. The bottom line is, there are too many variables to say for certain what the best approach would be, so both your and your mother's returns must be prepared under each scenario (you as her dependent, versus you claiming a personal exemption).

Answer 3

I know this is rather late, but with your income it is almost certainly better for your mother to claim you as a dependent. I was in a similar situation this last year, I didn't get the full weight of the tax break because my taxes went down to zero with this exemption along with claiming myself as a dependent. I used Turbotax to run both our taxes both ways to verify, the difference was about 1000 dollars saved for my parents to claim me as a dependent vs claiming myself as a dependent.

If you are unsure it doesn't take long to run the numbers through Turbotax, TaxACT, or some similar software.