Do I keep my adult kids under my taxes or file their own?

[DeniseNJ]

I have two adult children, 24 and 21, who are both in college part time, have investment accounts at vanguard, and have never worked a day in their lives (don't ask).  They live at home with dh and I.  I've always just listed them on our married joint taxes, even after they were over 17.  We make a combine $250K so don't qualify for any tuition breaks or anything else really.  We don't itemize bc even though our deductions should be over $30K, we can only deduct 10K from SALT taxes.  My NY, NJ, and property taxes are way way more than 10K, and the interest on the house added to the 10K allowable SALT deduction, doesn't go over the standard amount.  NJ taxes TSP (like a 401k), and even HSAs, and everything else.

My kids' income is only the dividends from their taxable vanguard account.  Their expenses are tuition and health care (they are under my insurance but rack up lots of copays, etc.).  I normally just add everything together and put it on the taxes, but I'm wondering if they should file their own and maybe wouldn't have to pay tax on their dividends.  They didn't get any covid money since they had never filed taxes.  I don't think it would hurt our tax bill since we don't get any credit for supporting them like dependents, right?

Thanks for any opinions.

[DeniseNJ]

Was going to delete bc I think I found the answer?  Doesn't let me delete but maybe others can use the info.

If you have dependents who don't qualify for the Child Tax Credit, you may be able to claim the Credit for Other Dependents. The maximum credit amount is $500 for each dependent who meets certain conditions.
The credit begins to phase out when your income is more than $200,000. This phaseout begins for married couples filing a joint tax return at $400,000.

So I get a thousand bucks by keeping them on.  Sounds better than what I pay for their dividend earnings. 

[seattlecyclone]

Whether your kids are dependents and whether they should file a separate tax return from yours are two separate questions.

Regarding whether they're dependents, there are two types of dependents: qualifying child and qualifying relative.

Based on the information provided I don't think they count as qualifying child dependents. For that they need to be either under age 19 at the end of 2023, under age 24 at the end of 2023 and full-time students for at least five months during 2023, or any age and "permanently and totally disabled" (unable to do any sort of paid work due to a disability, with a condition expected by a doctor to last at least a year).

To be a qualifying relative dependent they need to be a relative, not a qualifying child dependent of anyone, with gross income less than $4,700, and for whom you provided over half of the person's support. Sounds like they didn't provide much of their own support if they were living with you and didn't have jobs, but if their investment income was over $4,700 then they aren't qualifying relative dependents either.

Now, for separate tax returns...it's improper for you to just take their income and report it as your own. There is a form you can file as part of your return to elect to report your child's interest/dividend income on your own return, but just like for qualifying child dependency, you can only use that for kids in the 19-23 age group when they're full-time students.

Your kids should therefore probably be filing that income on their own return, if they're even required to file one in the first place. Looks like the requirement to file starts at $13,850 of gross income for non-dependents and $1,250 of unearned investment income for dependents.

[merula]

@seattlecyclone is correct.

When you say, "in college part time", do you mean that they are taking a course load that their school considers to be less than full time, or that they are only in college for part of the year but when they are they are taking a full time course load as determined by their school? The IRS's definition of full time student is fairly lax compared to what full-time student means colloquially. (And, also, I can't speak to your kids' school, but my school said that full time was at least 13 credit hours per semester, but it would take 16 credit hours to graduate in 4 years.)

https://itap1.for.irs.gov/owda/0/resource/Commentary_Files_Redirect_ITA/en-US/help/ftstud.html

If their dividend income is over $1,250, those are some lucky kids.

[DeniseNJ]

@seattlecyclone is correct.

When you say, "in college part time", do you mean that they are taking a course load that their school considers to be less than full time, or that they are only in college for part of the year but when they are they are taking a full time course load as determined by their school? The IRS's definition of full time student is fairly lax compared to what full-time student means colloquially. (And, also, I can't speak to your kids' school, but my school said that full time was at least 13 credit hours per semester, but it would take 16 credit hours to graduate in 4 years.)

https://itap1.for.irs.gov/owda/0/resource/Commentary_Files_Redirect_ITA/en-US/help/ftstud.html

If their dividend income is over $1,250, those are some lucky kids.

Their dividend income is definitely NOT over $1,250.  I think it's a couple hundred bucks.  They were custodial accounts under my name for them until they turned 21, which one did this year, so I had been putting the income under my name since the accounts were mine.

Unfortunately, I've been remiss in filing taxes the last few years.  I don't think the gov't will mind since they owe me lots of money rather than the other way around.  So I guess I'll be figuring this out soon.  Sounds like I'm in for a headache.

[seattlecyclone]

Their dividend income is definitely NOT over $1,250.  I think it's a couple hundred bucks.  They were custodial accounts under my name for them until they turned 21, which one did this year, so I had been putting the income under my name since the accounts were mine.

Were the custodial accounts UTMA accounts? If so, they most certainly were not yours. Money deposited to an UTMA account becomes the legal property of the beneficiary the minute it is contributed to the account. The custodian has the right to manage that money until the kid hits the age of majority, but that's a separate thing from whose property it is.

[DeniseNJ]

To be a qualifying relative dependent they need to be a relative, not a qualifying child dependent of anyone, with gross income less than $4,700, and for whom you provided over half of the person's support. Sounds like they didn't provide much of their own support if they were living with you and didn't have jobs, but if their investment income was over $4,700 then they aren't qualifying relative dependents either.

Now, for separate tax returns...it's improper for you to just take their income and report it as your own. There is a form you can file as part of your return to elect to report your child's interest/dividend income on your own return, but just like for qualifying child dependency, you can only use that for kids in the 19-23 age group when they're full-time students.

Your kids should therefore probably be filing that income on their own return, if they're even required to file one in the first place. Looks like the requirement to file starts at $13,850 of gross income for non-dependents and $1,250 of unearned investment income for dependents.

Sounds like they would be qualifying relatives since they certainly didn't earn more than a couple hundred bucks from their brokerage accounts.  I guess they don't actually need to file at all but I'd rather have them a qualifying relatives and pay the few bucks tax on their dividends if necessary b/c their health care expenses are considerable.  Not only do I pay for family insurance, but their uncovered deductible medical expenses are significant.

Up until recently I just input the forms wherever it says on the tax software.  You have to input one form at a time with whoever's name is on the form and answer the questions.  The software can then decide if they qualify or not.  But I didn't file taxes for 21 and 22 (I know, ugh) so I haven't had to figure this out since my oldest turned 21 in 2021, and until then his account was a custodial account in my name.

I really just want to take a pile of paper to some tax guy and let him figure it all out. :(

[DeniseNJ]

Their dividend income is definitely NOT over $1,250.  I think it's a couple hundred bucks.  They were custodial accounts under my name for them until they turned 21, which one did this year, so I had been putting the income under my name since the accounts were mine.

Were the custodial accounts UTMA accounts? If so, they most certainly were not yours. Money deposited to an UTMA account becomes the legal property of the beneficiary the minute it is contributed to the account. The custodian has the right to manage that money until the kid hits the age of majority, but that's a separate thing from whose property it is.

They were UTMA accounts.  I don't mean the money was mine to blow in Vegas.  I mean the 1099 came with my name and theirs on it so I could include the forms and pay taxes on the money.  I filled out the tax software filling out the information.  I filled out the info on the software, put in everyone names and socials and the amounts on line whatever, answered the questions, and paid what the software said.

[seattlecyclone]

To be a qualifying relative dependent they need to be a relative, not a qualifying child dependent of anyone, with gross income less than $4,700, and for whom you provided over half of the person's support. Sounds like they didn't provide much of their own support if they were living with you and didn't have jobs, but if their investment income was over $4,700 then they aren't qualifying relative dependents either.

Now, for separate tax returns...it's improper for you to just take their income and report it as your own. There is a form you can file as part of your return to elect to report your child's interest/dividend income on your own return, but just like for qualifying child dependency, you can only use that for kids in the 19-23 age group when they're full-time students.

Your kids should therefore probably be filing that income on their own return, if they're even required to file one in the first place. Looks like the requirement to file starts at $13,850 of gross income for non-dependents and $1,250 of unearned investment income for dependents.

Sounds like they would be qualifying relatives since they certainly didn't earn more than a couple hundred bucks from their brokerage accounts.  I guess they don't actually need to file at all but I'd rather have them a qualifying relatives and pay the few bucks tax on their dividends if necessary b/c their health care expenses are considerable.  Not only do I pay for family insurance, but their uncovered deductible medical expenses are significant.

Agreed that it sounds like they're qualifying relative dependents. You don't need to personally claim their income as your own and pay tax on it in order to claim them as dependents. It's their income, it goes on their tax return. They don't even need to file one though since their income falls below the threshold for owing any tax.

Their dividend income is definitely NOT over $1,250.  I think it's a couple hundred bucks.  They were custodial accounts under my name for them until they turned 21, which one did this year, so I had been putting the income under my name since the accounts were mine.

Were the custodial accounts UTMA accounts? If so, they most certainly were not yours. Money deposited to an UTMA account becomes the legal property of the beneficiary the minute it is contributed to the account. The custodian has the right to manage that money until the kid hits the age of majority, but that's a separate thing from whose property it is.

They were UTMA accounts.  I don't mean the money was mine to blow in Vegas.  I mean the 1099 came with my name and theirs on it so I could include the forms and pay taxes on the money.  I filled out the tax software filling out the information.  I filled out the info on the software, put in everyone names and socials and the amounts on line whatever, answered the questions, and paid what the software said.

Again, just because your name appeared as the custodian on the 1099s doesn't mean the income was yours. It was your kid's income the whole time. With luck, your tax software put that income on a Form 8814 (where a parent can elect to put a child's interest/dividend income on the parent's return). If that happened these dividends in such small amounts would not have been taxed. If the software lumped this income in with the rest of your income, you likely paid more tax than you should have.