A new tax season means that many college students or young adults who are not yet carrying out their own expenses could receive a total of $ 1,800 in stimulus relief.
Under the Coronavirus Aid, Relief, and Economic Security Act, or the Cares Act, individuals can receive up to $ 1,200 in Stimulus Relief ($ 2,400 for couples filing together). A second stimulus payment, signed into law by President Donald Trump on December 27, provides an additional $ 600 ($ 1,200 for couples).
Many college students lost their jobs or had declined incomes due to the pandemic, hoping they could receive much-needed stimulus payments. But for many people, there was an irritating catch with the stimulus funds: the money was not available when claimed to be dependent on another taxpayer’s tax return.
However, as the 2021 tax season starts, many young adults could qualify for a total of $ 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 payment. On line 30 of the 2020 Form 1040 or 1040-S, it is referred to as the “Reclaim Discount Credit”.
“College students may now be able to claim the incentive payment in the form of a refund credit as long as they are not claimed as dependent,” said Lisa Greene-Lewis, auditor and tax advisor at TurboTax.
Other adult relatives, including elderly parents or disabled adult relatives, could also receive an incentive payment if they are also not claimed as relatives for 2020.
According to Therese Tippie, CPA, tax manager and financial planner at EP Wealth Advisors in Torrance, Calif., The IRS uses a “support” test to determine if you can claim someone for your taxes.
The support test looks at who did more than half the support for the child, Tippie said.
“In general, support includes food, shelter, clothing, education, and medical expenses,” Tippie said. “If it was the parent, the parent should claim the child as dependent. If not, the child can claim itself. “
The IRS also encouraged young adults to determine if they were eligible for economic impact payment.
“College students in particular should be careful not to overlook these payments when they are self-supporting and cannot be claimed as being dependent on a person’s tax return,” said IRS Commissioner Chuck Rettig last year. “A few minutes of research could really help the students.”
Parents do not have to claim the dependent. Just find that you have to be dependent to claim head of household status, Tippie said. “If the parent doesn’t have a dependent, he or she would file a single, which is usually less affordable than the head of household.”
“It’s up to a parent whether they claim their student,” Greene-Lewis said. If parents support their college student and they are entitled to tax benefits – such as lower head of house tax rates and benefits like “other dependent” credit, EITC tax credit, or education credits – then they should be eligible for their student claim. If the student has worked and needs to file based on income threshold requirements, or if they want to request a refund, their parent can choose not to claim them as dependent, Greene-Lewis said.
Parents who only have the other $ 500 dependent care loan because they earn too much to qualify for other deductions and loans should consider not making their young adult child dependent for 2020 claim.
However, when it comes to financial strategy, it should be weighed up whether a dependent student or young adult can file a tax return to receive the $ 1,800 in stimulus money against the loans and deductions you may be giving up, which the ones from Increase taxes owed by you. Parents who are filing a child as a dependent may impact their EITC eligibility, which can be worth up to $ 3,584 for a qualified child. the American Opportunity Tax Credit (up to $ 2,500); or lifelong learning credit (up to $ 2,000), emphasized Greene-Lewis.
If your income is too high to qualify for these tax breaks, your tax burden may not increase significantly if you do not claim your child as a dependent. “But a single parent who claims the house head cannot claim the house head if his student claims himself,” Greene-Lewis said.
Parents of students should communicate about the problem, said Deenice Galloway of the Expert Tax & Consulting Service in Maryland.
Galloway had a client whose daughter – without her mother’s knowledge – filed her own return to collect the $ 1,200 stimulus payment. This meant her mother was no longer qualified to head the household. The change in the mother’s filing status could have resulted in a tax charge of $ 4,000, Galloway said. The mother found out when her federal return was denied by the IRS.
“She literally berated the daughter,” said Galloway, chuckling.
The daughter had to file an amended return and returned the $ 1,200 stimulus payment to the IRS.
“You really have to look at the individual situation,” said Galloway. “It can really have an impact on the people who submit as head of the household.”
Experts also point out that giving up your young adult child for 2020 doesn’t mean you won’t be able to return for 2021.
“The dependency can be checked from year to year,” said Tippie.