Daughter Starting College. Need Help Optimizing Our Affairs

Unless they changed things, you can choose not to claim her even though you could have.

That allows her to claim the American Opportunity credit herself, but not claim herself as a personal exemption and not claim any refundable AOC.

So only if she has enough taxable income that an AOC credit does her any good would this method work.

At higher incomes you can still qualify for the tuition and fees deduction. See if that works for you. From publication 970

married filing joint return AGI not more than $130,000 credit is $4,000. more than $130,000 but not more than $160,000 credit $2,000. more than $160,000 $0.

Since you're deep in AMT, maybe your AGI is well over 160k.

She can file her own tax return. She won't claim her own exemption.

Cool. She can get a refund of all taxes withheld. Some of the AOC will be wasted though.

On your tax return you can either claim her as a dependent, or not do so. In order for her to be able to claim the credit, you can't claim her.

You lose the exemption, but it probably makes no difference, but I'd have to do the calculations to be sure. The exemption is not allowed under AMT, so your regular tax will increase, and the AMT tax will decrease by the same amount.

Probably not. She should use the 25k to make some money in the stock market so that she can essentially use the full amount of the AOC.

Is she's a minor (under 18), it's considered support. If she's under

24 and in college, it might still be considered support. Don't know.

BTW, is the AOC expiring in 2010 or something like that?

Doesn't that depend on whether she can provide most of her own support?

You have a guaranteed way to make money in the stock market?

If it's a taxable gift, then doesn't it count as her providing her own support in that amount? That might help her reach 50%.

Seth

Previous paragraph said "We would be providing all of her support". So she can file her own tax return, but not claim the exemption. Of course, if she provides more than half her support, then she can claim her own exemption. The general rule, however, is that if your child did not provide more than half of her own support, then you can claim the exemption (see page 17 of the instructions). So if she provided

40% of her support, and the parents and an uncle provided 30% each, then the parents can still claim the exemption.

US Treasuries. But I'm bullish on the stock market, and personally think most stocks will do well (then again I thought this just before the DOW dropped 1000 points). This of course depends on your appetite for risk. I'd rather the daughter get a head-start on building her assets and the parents on reducing their estate. Of course, if the daughter claims her own exemption, she could get like 10% of $3,650 or $365, plus 40% of $2,500 AOC, for a total of $1,365.

Right, but I'm not even sure if it's a taxable gift. My it's just support for a child in college. Surprisingly hard to find anything on the internet about this.

On 8/5/10 9:51 AM, snipped-for-privacy@yahoo.com wrote

[snip]

Money that you put into a QTP for your child is a gift. If the annual amount exceeds the annual gift limit, you must file a Gift Tax Return. That's why the OP said he was going to File a 709 to make use of the 5 year exception for higher education. If a beneficiary withdraws funds from the QTP and doesn't spend it on qualified expenses, it is the beneficiary that reports the income not the parents.

So, what this all means is that one adds up the total support provided for the child. Total support would include the cost of college. Then you look at whether the child provided more than 50% of that total. Amounts withdrawn from the 529 count as the child providing her own support as that money is hers. Any other amounts from the child's own assets or income that is spent on support also counts as self-support.

It is likely, given the amounts mentioned in the OP, that the child is not providing more than 50%. I say that, because to the cost of $57000 for college (I'll assume room and board is in that.), you still have to add her additional meals, clothing, medical and dental, recreation, entertainment, travel, any other necessity of life and the fair rental value of the lodging being provided by the parents. This last item assumes we are dealing with a child who has not changed her domicile and is merely temporarily absent from her home and therefore would be a qualifying child if she is not self-supporting. If she has changed her domicile then she is not temporarily absent. For $57K I assumed that she is not living at home when attending college. If she is not temporarily absent she fails the qualifying child test and she fails the qualifying relative test because of her earnings.

As the child has full use of the parents' home, the fair rental value can be computed by using the fair rental value of a furnished home times a reasonable allocation to the child. In my mind, if there are 3 residents in the home, then 1/3 of the amount that a furnished rental would provide could be allocated to the child.

Works as a stockbroker?

Of course the resulting income would be ordinary income rather than capital gains, and also subject to FICA taxes. And income probably goes up in periods of high volatility, at least if lots of people are buying and selling.

Yes unless extended.

and continues "except for the support she provides for herself from her 529, from the $25K she has from the 2009 gift, and from any other gift we may make to her."

That depends on the amount they provide, and the amount specified in the "except" clause.

That's my point. If there's a way to wiggle things around so she does, then she claims her own exemption. (E.g. if tuition counts as support, can some or all of a year's tuition be paid in the prior year and count as support in that year?)

They can go down in value quite easily.

If they want it to be a taxable gift, they can always give her the money to buy the books, pay rent, etc.

Seth

If you hold to maturity you collect the interest or coupon payments. So that's the guaranteed income I was talking about. Of course, there's a 0.01% chance the US may default on interest payments.

Maturity can be 30 years later. If inflation picks up during that period, you have a little nominal income, and a huge value loss.

Seth