A new tax season means many college students or young adults not yet covering all their own expenses could get a total of $1,800 in stimulus relief.
Under the Coronavirus Aid, Relief, and Economic Security Act, or the Cares Act, individuals can qualify for up to $1,200 in stimulus relief ($2,400 for couples filing jointly). A second stimulus payment, signed into law by President Trump on Dec. 27, provides for an additional $600 ($1,200 for couples).
Many college students lost jobs or had their income decrease because of the pandemic and had hoped they could get much-needed stimulus payments. But for many people there was an irritating catch to the stimulus funds: The money wasn’t available if you were claimed as a dependent on another taxpayer’s return.
However, when the 2021 tax season opens, many young adults could qualify for a combined $1,800 ($1,200 from the Cares Act and $600 from the second round of economic impact payments). This is because the stimulus payment is actually an advance credit. On Line 30 of the 2020 Form 1040 or 1040-S, it’s referred to as the “recovery rebate credit.”
“College students may now also be able to claim the stimulus payment in the form of a recovery rebate credit as long as they are not claimed as a dependent,” said Lisa Greene-Lewis, a certified public accountant and tax expert for TurboTax.
Other adult dependents, including elderly parents or disabled adult relatives, could also receive a stimulus payment if they, too, aren’t claimed as dependents for 2020.
The IRS uses a “support” test to determine if you can claim someone on your taxes, according to Therese Tippie, a CPA, tax manager and financial planner at EP Wealth Advisors in Torrance, Calif.
“Generally, support includes food, lodging, clothing, education and medical expenses,” Tippie said. “If it was the parent, then the parent should claim the child as a dependent. If not, the child can claim themself.”
Parents don’t have to claim the dependent. Just realize that you must have a dependent to claim head-of-household status, Tippie said. “If the parent does not have a dependent, he or she would file single, which is usually less favorable than head of household.”
“It is up to a parent whether they claim their student,” Greene-Lewis said. If the parent is supporting their college student and they are eligible for tax benefits — like lower tax rates for head of household and benefits such as the “other dependent” credit, the earned-income tax credit (EITC) or education credits — then they should claim their student. If the college student worked and needs to file based on income threshold requirements, or if they would like to file for a refund, then their parent can choose not to claim them as a dependent, Greene-Lewis said.
Parents who take only the dependent care credit of $500 because they earn too much to qualify for other deductions and credits might want to consider not claiming their young adult child as a dependent for 2020.
However, in terms of financial strategy, allowing a dependent college student or young adult to file a return to claim the $1,800 in stimulus money should be weighed against what credits and deductions you may be giving up, which could increase the taxes you owe. Parents who drop a child as a dependent could affect their eligibility for the EITC, which can be worth up to $3,584 for one qualifying child; the American opportunity tax credit (up to $2,500); or the lifetime learning credit (up to $2,000), Greene-Lewis pointed out.
If your income is too high to qualify for these tax breaks, you may not see a significant increase in your tax bill if you don’t claim your child as a dependent. “But a single parent claiming head of household, however, would not be able to claim head of household if their college student claimed themselves,” Greene-Lewis said.
Before deciding whether to claim your child as a dependent for the 2020 tax year, or to allow them to claim their own stimulus payment, you should consider the effect on your tax situation, according to Deenice Galloway of the Maryland-based Expert Tax & Consulting Service.
Galloway had a client whose dependent daughter — without her mother’s knowledge — filed her own return to collect the $1,200 stimulus payment. Doing so meant her mother no longer qualified for head of household. The change in the mother’s filing status could have resulted in a $4,000 tax bill, Galloway said. The mother found out when her federal return was rejected by the IRS.
“She literally cussed the daughter out,” Galloway said, chuckling.
The daughter had to file an amended return, and she returned the $1,200 stimulus payment to the IRS.
“You really have to look at the individual situation,” Galloway said. “It really can impact those individuals filing as head of household.”
Experts also point out that not claiming your young adult child for 2020 doesn’t mean you can’t switch back for 2021.
“Dependency can be reviewed on a year-by-year basis,” Trippie said.