College Students and Stimulus Payments - 1st or 2

This post is from December, 2020. If you are looking for information on the stimulus payments from March 2021, please go here.

With a new round of stimulus payments coming under the new stimulus deal, many families of college students are hearing that they should declare their college students independent so that they can claim the stimulus payments. That may make sense for some, but it’s not universal good guidance. Here are a few factors to consider:

Both rounds of stimulus are refundable tax credits on your 2020 return. Among other things, that means that if you did not receive a stimulus check, you will get it when you file your taxes. You can only claim the credit if you are NOT claimed as a dependent on someone else’s return. The total credit amount is $1,800– the original $1,200 plus the new $600. That’s key to the decision: In order to be eligible, your student cannot be your dependent on your 2020 taxes.

When you do not claim your student, you give up the $500 dependent credit (for dependents over age 17), and you cannot claim the American Opportunity Tax Credit if you are otherwise eligible but do not claim the student as your dependent. That means that parents who do not claim their student give up somewhere between $500-$3,000 in tax benefits on their own return.

Students who are independent must also meet the facts of independence. Generally speaking, that means that parents provide less than half of their support. While this has historically not been an area of great inquiry by the IRS, 2020 may change that if large numbers of 18-to-22-year-olds suddenly file independent and claim stimulus payments. Student loans (taken out by the student), scholarships and withdrawals from 529 accounts might all be used to meet the standard of the student paying at least half of their costs. However, it could be complicated for students who came home in March and remained home until September to make that case.

If you are thinking of letting your student be independent in order to claim the stimulus, you should carefully review your situation– ideally with the help of a tax professional– because young adults who receive stimulus payments improperly are required to return them.