Attention Higher-Income Parents: A Tax-Savvy Approach to Claiming College Kids as Dependents
For families with annual household incomes exceeding $150,000-$200,000, it’s crucial to reevaluate the tax implications of claiming college-bound children as dependents. While the conventional wisdom suggests keeping kids on your tax return, a strategic approach could yield substantial savings.
Let’s explore two key scenarios where it may benefit your family to have your college student file independently:
Scholarships and Taxable Income: If your child receives a scholarship covering room and board expenses, that portion is considered taxable income. Surprisingly, many parents overlook this detail, only to face unexpectedly high tax bills in the thousands of dollars. By allowing your student to file independently, this taxable income falls into their likely lower tax bracket, minimizing the overall tax burden.
Educational Tax Credits and Deductions: Several valuable tax credits and deductions are available for tuition expenses, such as the American Opportunity Tax Credit. However, these benefits phase out for higher-income households. If you exceed the income thresholds (around $150,000 for joint filers or $75,000-$80,000 for single filers), you may miss out on substantial savings. Allowing your student to file independently could enable them to fully capture these education-related tax benefits.
Beyond these key considerations, the Tax Cuts and Jobs Act of 2018 significantly reduced the tax advantages of claiming dependents over 17, further strengthening the case for independent filing by college students from higher-income families.
Of course, every family’s situation is unique, and a comprehensive analysis is essential. However, for many affluent households, the potential tax savings from strategically “unclaiming” college students could be substantial, offsetting the costs of higher education and preserving more of your hard-earned income.
