529, stimulus, and child tax credit question

[FiguringItOut]

In 2020
I contributed $3,500 to 529 plan for my child
I paid $1,670 in tuition
I did not make any withdrawals from 529
I did not claim this child on 2020 tax return

In 2021
I contributed $5,000 to 529 plan
I paid $5,400 in tuition
I withdrew $3,200 from the plan
Also, in 2021 I received stimulus check for this child because it was based on 2019 return when I claimed her on my return.  And I received advance child tax credit for the younger child who was claimed on my return in 2020.
If I claim college age child on my 2021 tax return and my ex claims the younger child how will it affect my tax obligation in terms of advance child tax credit, stimulus, and tuition?

[secondcor521]

You first need to determine who can claim the children.  It's not always up to you and your ex's discretion.

I'm going to assume that both children are yours and your ex's children, and that they're both US citizens, and that you and your ex live apart and do not file a tax return together.

1.  Was the older one in college full time for at least five months out of the year (2021)?
2.  Was the older child under age 24 at the end of 2021?
3.  Did the children both live with you (or your ex) for more than half of 2021?  (For this purpose, being away at college counts.)

Assuming the answers to the above are all yes, then one starts to get into tiebreaker rules.  For those, it's helpful to know which parent each of the children lived with more, and which parent has the higher AGI for 2021.

[FiguringItOut]

You first need to determine who can claim the children.  It's not always up to you and your ex's discretion.

I'm going to assume that both children are yours and your ex's children, and that they're both US citizens, and that you and your ex live apart and do not file a tax return together.

1.  Was the older one in college full time for at least five months out of the year (2021)?
2.  Was the older child under age 24 at the end of 2021?
3.  Did the children both live with you (or your ex) for more than half of 2021?  (For this purpose, being away at college counts.)

Assuming the answers to the above are all yes, then one starts to get into tiebreaker rules.  For those, it's helpful to know which parent each of the children lived with more, and which parent has the higher AGI for 2021.

Yes, the answer to all of the above is yes.

Both children live with me (college kid was home for 2021 spring semester and on campus for 2021 fall semester).  I have full custody of both, and he has every other weekend and half holidays.  We each claim one kid, but I have some leeway of which kid I can claim.  Officially we supposed to alternate each year but we don't always. 

AGI - I don't know for sure how he files.  He remarried, but I don't know if they file together or separately.  I file HOH.  We both have income of about $100K.  I max out IRA (half Roth, half traditional), individual HSA, and 401K, and pay medical premiums. So my AGI is about $71K I think. He contributed $3K to 401K based on his last paystub of 2021, doesn't pay medical premiums and their medical plan is not HDHP anyway. I don't know for sure about him contributing to IRA, but if history is any indication the answer is no.   No idea about his wife.  He pays child support, but it doesn't affect my taxes.  We split kids' medical costs 50/50, but my 50% is never more than my standard deduction.  I pay all medical expenses out of pocket and don't touch my HSA.    The tuition I paid was 50% of kid's tuition, he paid other 50%.  He doesn't have 529 for her.  I use mine just to get NY state deduction.  Which means I will pull some portion of it out of the account in 2022 after I pay 2022 tuition and then deposit it back in as contribution.

[seattlecyclone]

Yes, do double-check the rules for who can claim which child(ren) as dependent(s). There's a process for a custodial parent (the parent who the child stayed with for more nights during the year, or the parent with a higher income if there's a tie) to allow a non-custodial parent to claim a child, so if you're relatively amicable about things, or otherwise agreed to split dependents when you divorced, it seems you should be able to decide about dependents amongst yourselves for the younger kid. For a child who has reached the age of emancipation in your state, this process does not apply. You have to go with the basic dependency rules (principal place of residence in your house for the majority of the year) for the older one. Maybe your older kid could decide for themself that their principal place of residence while off at college is with whichever parent you want to be able to claim them? Not sure.

Supposing you will be able to claim only the older one as a dependent this year as you expect...

Stimulus payment: I don't think anything happens here. If the amount of stimulus would be the same based on your 2019 situation as it was in 2021, I don't think it matters if you swap one dependent for another.

Tuition: You're welcome to open a 529 for a family member and pay educational expenses from it whether they're a dependent or not. Do be careful about the double-dipping rules: if you or your child is claiming this tuition toward an education tax credit or certain other educational benefits, you're not allowed to attribute this same tuition toward a 529 withdrawal. That said, also remember that 529 funds can be used for room and board if you're at least a half-time student, so it seems likely that this withdrawal will be qualified in any case.

Child tax credit:
You'll probably need to repay most or all of the advance child tax credit if your younger child was not your dependent for 2021. The repayment amount may be reduced or eliminated if your income is low enough. The amount of repayment is calculated on Part III of Schedule 8812.

[secondcor521]

Since the kids both lived with you more than half the year, the next questions / assumptions:

Neither child is married, correct?
You're not being claimed by anyone as a dependent, correct?
You and your ex provided more than half of the support of your children, correct?
Neither child provided more than half of their own support, correct?
(Support is based on who paid for stuff like food, shelter, clothing, medical, dental, and education, and some other stuff.)

The next big questions would be:

1.  Did you complete a Form 8332 for 2021 to give your ex permission to claim either or both children?
2.  Did your divorce decree give him such right(s) for 2021 for either or both children?
3.  If yes to #2, what is the year of your divorce?

To get ahead on your other questions, is the tuition you refer to college tuition or private K-12 tuition?

[FiguringItOut]

Since the kids both lived with you more than half the year, the next questions / assumptions:

Neither child is married, correct?
You're not being claimed by anyone as a dependent, correct?
You and your ex provided more than half of the support of your children, correct?
Neither child provided more than half of their own support, correct?
(Support is based on who paid for stuff like food, shelter, clothing, medical, dental, and education, and some other stuff.)

The next big questions would be:

1.  Did you complete a Form 8332 for 2021 to give your ex permission to claim either or both children?
2.  Did your divorce decree give him such right(s) for 2021 for either or both children?
3.  If yes to #2, what is the year of your divorce?

To get ahead on your other questions, is the tuition you refer to college tuition or private K-12 tuition?

Yes we provided more than half of the support, I'm not claimed by anyone.

I complete Form 8332 every year to give him permission to claim one of the kids.  Per divorce decree we supposed to alternate who claims each kid, but we don't always alternate.  Basically I can complete Form 8332 how I want and give the kid I choose as long as he gets at least one of the.  We divorced in 2016.
The thing is, younger one is turning 18 in 2022.  So this is the last year she can get child tax credit.  But if I don't claim older one I can't take advantage of any tuition or educations credits and he then gets to use Form 1098-T.  Because I claimed younger one in 2020, I can switch and claim older one in 2022.  But I can also keep younger one and give him Form 1098-T. I'm not sure what is better for me.  Form 1098-T for 2020 that we received from college had amount on that was actually larger than the total payment we made to the school.  I called the school then and was not able to get any clear answers why the amount was so much larger.  Basically in 2020 between the two of us we paid a total $3,200 to school and Form 1098-T had amount of $4,700 for payments received for qualified tuition and related expenses.  I have no idea what to expect on this form for 2021.  I believe that the amount that can be claimed on the return is the amount one actually paid, but I'm pretty sure he claimed the whole $4,700 instead of $1,600 he actually paid from what I gathered from some conversations we had.  I don't know if I can do the same in 2021 and claim the full amount paid to school and not just the amount I actually paid if I claim this kid. 

[secondcor521]

Hmm.

Well, from the point of view of the IRS, you're entitled to claim both of your children as your dependents.  From the point of view of the IRS, your ex would only be able to claim either of the children as dependents if you complete Form 8332 for tax year 2021 for either or both of the children.

You'd still have to comply with the terms of your divorce decree unless your ex lets you off the hook, which they may or may not do, of course.

So I guess I can try to give you my answers to your questions:

1.  Typically you'd be able to take any state tax benefit for both your 2020 and 2021 tax returns for your 529 contributions regardless of whether you've claimed the children as your dependents during those years.  This assumes that your state has such a benefit and doesn't have any rules requiring the children to be your dependents.  My state doesn't, and I don't think any do, but I don't know for sure.

2.  For the ACTC, you're required to reconcile what you received in advance (based on the Letter 6419 you should receive soon) with what you should have received (based on the dependents you actually claim).  If you received more than you should have, then you may have to repay some or all of the excess.  This repayment may be limited if your 2021 MAGI is under $100K (for HOH status) and if the number of children that the ACTC was based on is higher than the number of children you have as dependents in 2021.  As the other poster noted, this is calculated on Form 8812, and the repayment and repayment limitation is in Part III of that form.

(If I did the math right, it looks like a filing status of HOH with a 2021 MAGI of $70K would mean that if your ACTC was $1200 or less, you wouldn't have to repay any of the ACTC.  But double check my math!)

3.  Regarding EIP3 (the third stimulus payment) that you probably received sometime between March and September 2021, unlike ACTC, you do not have to pay whatever you received back.  You received what you were entitled to receive based on your 2020 return, and your tax software will calculate what you are entitled to based on your 2021 tax return, and you'll be entitled to the larger of those two amounts.

4.  Regarding any education credits, you're only entitled to those in 2021 for whichever dependents you claim on your tax return in 2021.

5.  The increase in the CTC age to 18 is currently a temporary increase for 2021.  So just to make sure you're saying what I think you are, neither you nor your ex would be entitled to the CTC for the younger child in 2022 unless Congress changes the law in that regard.

6.  The 2020 Form 1098-T from the school might have included amounts for spring 2021 - you could look to see if box 7 was checked.  I personally ignore 1098-Ts and just keep my own detailed records of expenses paid that qualify for the educational credits (in my case, mostly 529 withdrawals and AOTC) based on the law.  As you correctly note, it is (generally) the qualified expenses actually paid, not what the 1098-T might say.

7.  Neither of you (but this is pointed at your ex) is entitled to education benefits for any amounts that you didn't actually pay.  So he's probably breaking the (tax) law if he took an education benefit based on money you paid.  And you would be if you did so.

8.  Assuming the $5,400 you paid in 2021 was for academic periods in 2021 or starting in the first three months of 2022, then you are likely entitled to your $3,200 529 distribution being tax free.  If you claim the older child, you're also probably entitled to take the AOTC based on the ($5400 - $3200 = ) $2200 of out of pocket expenses you paid.  You'd also be entitled to AOTC for additional qualified expenses such as room and board, books and fees, and computer equipment.  See the relevant sections of Pub 970 to learn more specifically about the rules and limits and what is included:  Chapter 8 is about 529s (it calls them QTPs), and Chapter 2 is about the AOTC.

9.  As to your unstated question, as long as your ex is OK with you taking whichever child gives you the best benefit, I'd prepare your tax return both ways - once claiming the eldest, a second time claiming the youngest - and look at the bottom line tax liability for both federal and state taxes and make my decision that way.

[FiguringItOut]

Thank you
This has been very helpful

[seattlecyclone]

Well, from the point of view of the IRS, you're entitled to claim both of your children as your dependents.  From the point of view of the IRS, your ex would only be able to claim either of the children as dependents if you complete Form 8332 for tax year 2021 for either or both of the children.

I want to reiterate something I alluded to in my previous post. Form 8332 cannot be used for the older child if they are past the age of emancipation in your state (usually 18). This form is to be used for parents wanting to take advantage of the "special rule for children of divorced or separated parents" that allows a parent to claim a child as a dependent even if they lived more of the year with the other parent. See Page 2 of that form for the prerequisites for this rule, namely

2. The child was in the custody of one or both of the parents for more than half of the year.

If the kid turns 18 (or whatever age applies in your state) before the middle of the year, this condition cannot be met. The child is in no one's custody, meaning you're ineligible for this special rule and are stuck with the basic dependency rules at that point. These rules look at whose home the child claims as their principal residence when they're not at school. If you want to switch which parent can claim the older child, I think the only option would be for the child to change their principal residence to the house of the other parent.

[secondcor521]

^ @seattlecyclone I appreciate the correction and amplification.

ETA:  I agree with you that the college aged kid would have to change which parent they lived with to be more than half the year with the parent of which they wanted to be claimed as a dependent.  I think in theory this would be hard for the OP to do in retrospect for 2021, since 2021 has already happened and the facts and circumstances are whatever they are.

Although I'm not sure how the IRS or the college student or the parents know which house they're temporarily away from when they're at college (?).  So if the older child were away at college for two semesters last year, then it would perhaps be unclear which home they were temporarily away from and thus which parent they actually lived with.  If for whatever reason they took either spring or fall off and lived with OP during that time, it'd be hard for me to make the argument that they were a dependent of the ex.

[seattlecyclone]

Right, it seems impossible to change the primary residence after the fact. They thought of one parent's house or the other as "home" and that's that. Like you, I have no idea what the IRS looks at when determining where a college kid's real, actual primary residence is if there's some dispute. In practice, assuming the three of you can agree amongst yourselves which house was the kid's primary residence, who's going to dispute that?

[secondcor521]

7.  Neither of you (but this is pointed at your ex) is entitled to education benefits for any amounts that you didn't actually pay.  So he's probably breaking the (tax) law if he took an education benefit based on money you paid.  And you would be if you did so.

I just learned today that the above is probably inaccurate.  Refer to Pub 970, page 20, "Expenses paid by others" (https://www.irs.gov/pub/irs-pdf/p970.pdf)

[FiguringItOut]

7.  Neither of you (but this is pointed at your ex) is entitled to education benefits for any amounts that you didn't actually pay.  So he's probably breaking the (tax) law if he took an education benefit based on money you paid.  And you would be if you did so.

I just learned today that the above is probably inaccurate.  Refer to Pub 970, page 20, "Expenses paid by others" (https://www.irs.gov/pub/irs-pdf/p970.pdf)

Wow, thank you!