Paying for college for son

[Heinz]

Our oldest son is starting college this year and we have the savings in a UGMA account (instead of a 529 as when we started the 529 options in our state were limited). 

My plan is for our son to file his taxes indepent of ours, so we will no longer be claiming him as a dependent (which is not an impact due to AMT phaseout).  As I read the tax laws, and have discussed with our accountant, as long as our son provides over 50% of his support this year, he can file Single.  This will enable almost no federal taxes on capital gains, his small summer job and also enable the EITC and a college credit. 

Has anyone else done this? 

[secondcor521]

I have not, but I think you and your accountant are correct.  You might find the following links to IRS worksheets for determining 50% support helpful:

https://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

https://taxmap.irs.gov/taxmap/pub17/p17-017.htm#TXMP3bed64db

I would think that the UGMA balance would be part of line 1 of the worksheet, since it's essentially a savings account in your son's name.

Since education expenses are listed on line 15, I think you're in the clear as long as he pays his college expenses from the UGMA account.  If you paid the college expenses from some other source, then I think you might have issues.

Note that even if he files his own taxes, you may still be on the hook to report your parental income and assets for FAFSA and CSS/Profile purposes.  It's pretty difficult for a kid to be viewed as an independent student for financial aid purposes.

Also, some of the college related credits are non-refundable or partially non-refundable, so if he has a low income, he may qualify for the credit but much of the credit might go unused because it would only be offsetting a small or even zero tax liability.  It's hard to do ahead of time, but if possible I would recommend that you analyze things both ways - that is, run taxes as though he is a dependent and then run them again as though he is your dependent - then try to aim for the situation that is most beneficial.

[secondcor521]

I'll add that the EITC is really really challenging to qualify for.  Unless your son has a child of his own (unlikely), if he's under 25 he doesn't qualify for EITC:

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/claiming-eitc-without-a-qualifying-child

[Heinz]

Thank you both for the replies...and the links. I think he will have about $30k in capital gains & dividends and then $4k earned income. 

[teen persuasion]

Thank you both for the replies...and the links. I think he will have about $30k in capital gains & dividends and then $4k earned income.

EITC has a hard cliff: if you have investment income of $3500ish you are not eligible at all, full stop.

Providing 50%+ of his own support has different definitions for dependency vs credit qualification.  For at least one of them he must provide more than 50% from earnings, not just investments.  Read the details closely.  I'm always confusing the different rules.

He will still be considered a dependent for financial aid purposes (even if he is not for tax purposes) unless he is over 24, in grad school, married, has a dependent, member of the armed forces, etc.  His income and assets will be reported on the FAFSA and added to yours (after minimal "protection" amounts are removed).  Google "EFC formulas 2018-19" to get the pdf and do your own calculations.  I don't believe the newest version for the upcoming filing is out, yet, but you could try 2019-20 too.

[Heinz]

So I found links for FAFSA, which seem different than for IRS qualifications.  My intent is for IRS only, not to change his qualification for merit or loans. 

[secondcor521]

So I found links for FAFSA, which seem different than for IRS qualifications.  My intent is for IRS only, not to change his qualification for merit or loans.

Yep.  The rules for "independent" are different between FAFSA and IRS.  It sounds like your son will be independent in the eyes of the IRS but a dependent student in terms of FAFSA.  This can happen and is totally fine, albeit a bit unusual...many kids remain dependents of their parents in terms of the IRS while they are in college.

FAFSA doesn't affect merit aid directly.  FAFSA is used to determine eligibility for Pell grants and subsidized loans, as well as need-based federal aid.  Depending on the school, it may also be used for institutional aid.

[Heinz]

Thank you; aid is less of a concern versus minimizing taxes.