To Claim or Not To Claim.... Students, as a Dependent on Your Taxes.
Will claiming my student as a dependent affect the amount of financial aid they receive?
Whether or not a student is claimed as a dependent on their parent's tax return has no impact on the student's eligibility for financial aid and scholarships. The student will not get more financial aid by claiming themselves on their own tax return.
Although the word "dependent" is used on both the federal income tax return and the Free Application for Federal Student Aid (FAFSA), one has nothing to do with the other. The word "dependent" for federal student aid purposes is defined by the Higher Education Act of 1965, while the definition of "dependent" for federal income tax purposes is based on Internal Revenue Code of 1986.
The FAFSA currently includes ten questions that are used to determine whether a student satisfies the statutory requirements to be considered an independent student. These questions can be found here at this link. https://studentaid.gov/apply-for-aid/fafsa/filling-out/dependency
All other students who do not meet the criteria for determining themselves as an independent student are considered to be dependent and will need to report their information as well as the parent's information on their FAFSA application.
None of these criteria are based on whether the student was claimed as a dependent on their parents' federal income tax returns.
The current set of rules concerning independent status were designed to prevent the student's parents from manipulating the student's status to qualify for more financial aid. The federal government considers the student and the student's parents as having the primary responsibility to pay for the student's college education. The federal government provides financial aid only to the extent that the family is unable to pay for college.
Are there other things to consider when claiming my student as a dependent?
Other things to consider when claiming your student as a dependent is who claims the education credits and who receives the more recent economic impact payments that have been given during the pandemic.
The IRS is pretty clear on whether a parent or a student can claim an education tax break: It's either one or the other- not both.
Typically, it comes down to income and who can get the full benefit of the education credit since half of the credit is nonrefundable, meaning, that part of the credit is used to lower a person's tax liability. If the student has less income, their tax liability will not be as high as their parent's, which will make them lose that half of the education credit if they claim themselves on their tax return.
Everyone's tax situation is different, so parents and students need to communicate during tax time, and to discuss with a tax professional to know who should claim themselves, or if it's more beneficial for the parents to claim their student as a dependent.
A new thing to consider is the current economic impact payments that have been given in more recent months. A parent who claimed their student on their tax return did not receive an economic impact payment for anyone over the age of 17. If a student had claimed themselves on their tax return they were eligible for the economic impact payment. Before you go and amend your return so they can get this new government relief, you need to look at how it impacts your taxes to do so. It would not be the right move to amend your taxes if you need to pay back $3,000 on your own taxes so that your student can claim the previous $1,200 payment and the more recent $600 payment.
If you need help in deciding which is the right move for your tax situation, please contact our office and we would be happy to talk to you.