Gift tax and tuition for child filing separately

Gifts are almost never taxable income. And for children under 18, or those in college and under 24, if they have unearned income (for example you give them business equipment and lease it back) it's taxed at the parent's tax rate anyway.

Whatever you are planning, it's unlikely to work the way you think it would. You should contact a tax professional (CPA or Enrolled Agent) to discuss your needs.

Actually, the parents have already filed the 2020 income tax claiming the two children ages 17 and 19 as dependents. Since the parents' AGI is above the limit allowable for a stimulus check for the children, the children would like to to file separately to get their stimulus checks by claiming their tuition and some gift money as income. Of course the parents would have to file an amended return to remove the children as dependents. Is this allowable?

Thanks for the response. My friend sent anther post but it is not posted here yet. The idea is that the two children who are 17 and 19 were included as dependents on the 2020 income tax with an AGI above the stimulus limit. The children want their stimulus checks. So, if the children file separately and they include gift money and tuition as income, will they qualify for the stimulus due to lower incomes. Of course, the parents have to amend their return. Thanks.

Gifts are not income. Sounds like that would be fraud.

The post is simply to ask if it is allowable. Thanks.

According to D L snipped-for-privacy@gmail.com:

Since it would be tax fraud, no, it is not allowable.

There is a solution that might get them the EIP/RRC without filing a fraudulent return. If the parents file a superseding return changing their filing status from MFJ to MFS, the dependents can be claimed on the parent's return with the lower income. That could create a situation where that parent and the two children qualify for the RRC. Be aware, however, that filing MFS can have other consequences that outweigh the benefit from the RRC.

Ira Smilovitz, EA Leonia, NJ

Very interesting option but as you correctly point out, there may be other trade offs. It looks like it is not worth doing. Thanks for the response.

To be eligible for the Recovery Rebate Credit (RRC) you can not be a dependent of another taxpayer. Whether or not that taxpayer actually claims the dependent is irrelevant for the RRC. Dependents claimed or not claimed are not eligible.

As an aside, the only advantage for not claiming a dependent appears to be when the taxpayer gets no or very little benefit (deductions and credits) of the exemption and the dependent child is a college student with qualified higher education expenses and taxable earned income that can be offset by the higher education tax credit. The child can claim the tax credit if the parent does not claim the child.

When a 20-year old college student has earned income during summer internship, and they use it to pay tuition / living expenses - will that make them independent (single) rather than "dependent of parent" for tax purposes ?

Thanks

If the student provides more than half of their own support, they cannot be claimed by anyone as a dependent.

The IRS says "Support includes amounts spent to provide: Food, Lodging, Clothing, Education, Medical and dental care, Recreation, Transportation, and Similar necessities."

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