Betty, age 43, has a daughter Sally, age 20. Betty receives child support from Sally's father. For 2013, Betty declared Sally as a dependant.
In January, Betty threw Sally out of the house, but "promised" to pay Sally's rent with the child support. Sally now lives in an inexpensive apartment. Sally does occasional baby-sitting under-the-table. Sally goes to a community college 3/4 time.
Betty's "promise" to pay the rent collapsed. Although Betty pays some of Sally's expenses, Betty uses most of the child support to pay her own expenses. To cover the shortfall, Grandpa stepped up and pays Sally's tuition and Sally's rent. Grandpa does this by giving Sally highly-appreciated stock which Sally sells to cover her expenses. For 2014, Sally's long-term capital gain will be about $12000.
For tax purposes, can Sally declare herself independent so that the long-term capital gain is taxed at Sally's tax rate (which is zero percent).
If the KiddieTax does apply, who pays it? Betty can be quite belligerent. Grandpa does Sally's tax return, and Betty isn't going to cooperate with Grandpa at all. Grandpa's inclination is that Sally should just declare herself as independent and see if the IRS complains. =================== Here are my thoughts in order:
Although Betty threw Sally out of the house, she's still collecting child support for her. Therefore, dependency is still implied. Alternatively, there may be a fraud issue here for Betty.
I don't know what "3/4 time" means for college. Most places have a credit/semester (or quarter) threshold to separate part-time from full-time. Therefore, her student status is unresolved.
The apartment can still be while "temporarily away from home" even when in the same locality. It depends on what Betty did with Sally's room after tossing her out, i.e. can she return?
What Grandpa did was nice, but he might be providing 50%+ support, or there could be a multiple-support agreement issue. We don't know how much Betty paid for support.
Sally's LTCG is more than her personal exemption amount. If the student under age 24 rule does not apply, she cannot be claimed as a dependent. Otherwise, she is.
Therefore, I content that the information is insufficient to make a determination with regard to Sally being a dependent or not (and of whom).
Will the IRS complain? YES. I have seen it before, in the case of an acquaintance of a friend who got a letter from the IRS the year he turned 19 that he could not claim himself as a dependent. He lived in an affluent area where the children normally go to college. However, this letter recipient was NOT a full-time student that year. When I told him to ask the IRS who they thought should claim his exemption, the IRS backed off.