Children grow up so quickly. In my own experience, some grow up quicker than others. But in the eyes of the IRS, children and adults have tax filing requirements regardless of maturity. With college-bound children, it’s important to know the differences in how you should file, along with your child. Choosing which way to file is something you should speak to a qualified accountant or CPA for. But the considerations of which are best can help clear up some confusion. For this post, we focus on the tax-filing status for families with college students.
Difference between Financial Aid Status & Tax Status
An important distinction to make in this post is that the Department of Education and the Internal Revenue Service are two separate branches of the federal government. However, for college bound children, they use similar language that can be confusion.
Department of Education
The Department of Education will label your child either a dependent or independent student. This is strictly for financial aid purposes and the amount you can qualify for. Thankfully, the Department of Education gives us a nice breakdown of the differences in a 2 page guide. For most students attending college right out of high school, they will fall into the dependent student status.
IRS Dependency Status
When it comes to being able to declare your child as a dependent on your tax return, there are different criteria. For example, the dependent must be under 19, but if the child is permanently and totally disabled, he/she can be listed as a dependent. The other exception is a full-time student can be at least under age 24 if a full-time student. Therefore, most students who are full-time college students can be claimed as a dependent. The remaining criteria can be found in the IRS guide.
Types of Filing Status
In the United States, we have 5 types of filing statuses:
- Single
- Married Filing Jointly
- Married Filing Separately
- Head of Household
- Qualifying Widow(er) with Dependent Child
An additional and common filing status is to have the child claimed as a dependent on his/her parent(s) return. Let us cover the different criteria for each and how that can benefit the parents & child as taxpayers.
The Most Common: Dependent vs. Single
For the vast majority, the tax-filing status for families with college students will either be a single filer or as a dependent on his/her parent(s) return. The difference in criteria is important and the IRS guide referenced above does provide an initial breakdown of if you can claim your child as a dependent on your return. But there is also another way to claim your child if the above criteria are not met:
- You provide more than half of the child’s support
- The child’s gross income (income not exempt from tax) is less than $4,400
Dependent of Parents
In the event a dependent is claimed, you may be eligible for some tax credits such as the Credit for Other Dependents. Note: there are phaseouts of $200,000 ($400,000 for married filing jointly).
Another tax credit to consider is the American Opportunity Tax Credit. More on this in another post, but if you cash flow after tax dollars to your child’s school tuition, you can receive up to $2500 back in a credit per child. Again, there are income limits here to be aware of.
Student Filing Single
For students who file single, chance are that the student made more than the single income filer’s standard deduction ($13,850 in 2023). That could include earned income, such as a part-time job, but also any investment income. In the event the student had wages withheld while working for an employer, it may allow him/her to receive those funds back come tax time the next year.
Ultimately, you’ll want to work with a tax professional to determine which filing status will allow you to minimize you and your child’s taxable liability. But if your student does file single, he/she may be eligible to contribute to a Roth IRA, which can be a great tool for college funding if properly planned out and utilized. It is also a great tool for future retirement planning if you’d rather not utilize it for college.
Married College Students
While it may be rare these days, it’s not impossible to come across a married college student coming from high school. If that’s the case, that student would be considered an independent student for financial aid purposes.
The downside is you wouldn’t be eligible for a subsidized Direct Loan (Stafford Loan), but you would be eligible for an increased unsubsidized Direct Loan. You’d also benefit from lower tax rates compared to a single filer, and you could also find yourself in position to qualify for tax credits & deductions that you wouldn’t have been able to qualify for. You can choose the married filing jointly or married filing single status. It’s worth speaking to your tax professional and talking through the pro’s and con’s of each.
Head of Household
While rare, it’s also possible for a student to apply head of household. This filing status can allow for higher standard deductions, more generous tax brackets, and higher income limits for tax credits. That said, there are more criteria to meet if looking to file head of household. Check out this article and speak with your tax professional to determine if it’s a fit for you.
Qualifying Widow(er) with Dependent Child
In the unfortunate event of a spouse’s death, a surviving spouse may qualify for the Qualifying Widow(er) with Dependent Child filing status for up to two years after the spouse’s death. This status allows the surviving spouse to use the higher tax rates and more favorable tax brackets of the Married Filing Jointly status.
To qualify, the surviving spouse must have a dependent child and meet specific criteria outlined by the IRS. Being that you again have a child who is a dependent and reliant upon you, you’d almost assuredly file as an independent student for Department of Education purposes.
This filing status provides a temporary financial cushion for college-bound students who have lost a parent, potentially easing the burden of taxes during a difficult transition.
Conclusion
Knowing which filing status you’re going to choose as a college student becomes especially important when trying to minimize taxes. Sometimes, circumstances will dictate which filing status you must choose, but other times, you can be flexible and plan to file in a way that best minimizes your taxable liability. As always, a qualified tax advisor or CPA can help with the choice of which tax-filing status for families with college students.
