Offset expenses for your college student with the dependent tax credit

College is expensive. And while $500 doesn’t cover much for today’s college student, it can certainly help with some of the expenses for books, clothing, software, and other needs.

Background of child tax credits

When the Tax Cuts and Jobs Act (TCJA) reformed tax law for 2018 and beyond, one positive change for parents was an increase in the child tax credit to $2,000 per qualifying child under the age of 17. The law also substantially increased the phaseout income thresholds for the credit so more people could qualify for it.

However, if you’re the parent of a dependent older child (age 17 to 23) who is in college, and you pay all (or most) of his or her expenses, you might be surprised to learn you’re not eligible for the child tax credit. Unfortunately, the TCJA eliminated dependency exemptions for older children from 2018 through 2025. But you’re not entirely out of luck because there’s another dependent tax credit that could be available to you.

The TCJA established a new $500 tax credit for qualifying dependents who aren’t children under 17. A qualifying dependent for purposes of this credit includes:

• a dependent child who lives with you for over half the year and is over age 16 and up to age 23 if he or she is a student
• other nonchild dependent relatives (such as a grandchild, sibling, father, mother, grandfather, grandmother, and other relatives)

To be eligible for the $500 credit, you must provide more than half of the person’s support for the year, and he or she must be a U.S. citizen, U.S. national, or U.S. resident.

Both the child tax credit and the dependent credit begin to phase out at $200,000 of modified adjusted gross income (or $400,000 for married joint filers).

The child’s income

After the TCJA passed, it was unclear if your child would qualify you for the $500 credit if he or she had any gross income for the year. Fortunately, IRS Notice 2018-70 favorably resolved the income question. According to the guidance, a dependent will pass the income test for the 2018 tax year if he or she has gross income of $4,150 or less. The $4,150 amount will be adjusted for inflation in future years.

Contact us at KraftCPAs with questions about whether you qualify for either the child or dependent tax credits. We’d be happy to discuss this and other tax matters with you to help you pay the least amount of tax possible.