Updated July 2, 2021
Understandably, many parents get in the habit of claiming their children as dependents on their federal tax returns. While you may do so as long as your child is either under age 19 (if a non-student) or under age 24 (if a student), there is a compelling reason to not claim your child as a dependent.
Credits and Phaseouts
The two primary college-funding tax credits available are the American Opportunity credit and the Lifetime Learning credit. Thanks to recently passed legislation, the American Opportunity credit now permanently allows eligible taxpayers to take an annual credit of up to $2,500 for the first four years of post-secondary education. The Lifetime Learning Credit provides up to $2,000 in relief to those eligible. Just know that if you plan on taking advantage of the credit, you can’t claim both credits in the same year for the same student.
These credits are subject to “phaseouts” that limit eligibility for higher-income taxpayers. For example, for the 2020 tax year, eligibility for the American Opportunity credit begins to phase out for taxpayers with Modified Adjusted Gross Incomes (MAGIs) above $80,000 (for single filers) or $160,000 (for married couples filing jointly). Similarly, eligibility for the Lifetime Learning Credit begins to phase out for taxpayers with MAGIs above $59,000 (for single filers) or $118,000 (for joint filers).
When You Should Consider Not Claiming Your Child as a Dependent
If your income disqualifies you from claiming these credits, it’s likely that your child’s income probably doesn’t disqualify him or her. If this is the case, your child may be able to report payment of education expenses for tax purposes and then claim one of the credits. However, they will only be able to do this if no one claims your child as a dependent. This is when you should consider not claiming your child as a dependent, that way they can take advantage of either of these credits.
Because multiple factors can affect whether or not you should claim your child as a dependent, be sure to check with your Untracht Early advisor to help you make the proper determination.