Tax CPE Needed to Resolve Some Dependent Student Situations

Tax CPE Needed to Resolve Some Dependent Student Situations

Preparing for unusual tax scenarios is part of the training for enrolled agents. In fact, the ability to handle uncommon situations is an important selling point for a tax practitioner. One matter that allows you to prove the extent of your tax knowledge involves student dependents that are not children of taxpayers they live with.

These cases can arise, for example, with grandchildren, nieces and nephews. In fact, students who don’t live with nor receive support from their parents are more likely to have college scholarships. This allows you to put completion of your enrolled agent continuing education requirements to work solving problems. Correctly addressing the tax ramifications for these individuals represents a valuable service.

Plenty of questions on the enrolled agent exam deal with student scholarship money. These amounts are not taxable income when used for tuition and fees as well as schools books, equipment and supplies. However, any excess not used for these purposes is taxed. That taxable amount includes scholarship funds applied to room and board.

But an interesting wrinkle in the tax CPE covering scholarships is that these funds are considered when making support test calculations. Scholarship funds are excluded from support test determination only when the student is a dependent child of the taxpayer. For this purpose, a child includes stepchildren, foster children and adopted children.

However, descendants of children – such as grandchildren – are not entitled to this exemption. Their scholarships are included in determining how much they contribute to their own support. Consequently, scholarships can affect students so that they no longer are eligible as dependency exemptions for taxpayers they live with. To qualify as a dependent, the taxpayer must have provided more than half of the person’s support.

There is some caution required in using the worksheet provided by the IRS for calculating the support test. This worksheet allows you to exclude as income for the person supported any “amount others provided for the person’s support.” There is room for debate about whether a scholarship comes from others or is the student’s own income (despite being non-taxable).

In addition, the taxpayer with whom a student lives may become ineligible for Head of Household filing status due to scholarship funds. This can occur is the student’s scholarship money pays for a significant portion of the cost to maintain the taxpayer’s home. That might occur when the student chooses to contribute scholarship funds intended for room and board toward the upkeep of a relative’s home where the student lives. Head of Household status requires a taxpayer to pay at least half the cost of maintaining a home. This test can fail due to a combination of public assistance and family funds – including from the student’s scholarship.

A reasonable and methodical approach is obviously required for situations of dependent students with scholarship income. The thought process for each case is an extension of enrolled agent continuing education. So these are examples to point out as why enrolled agents possess the high level of expertise that many taxpayers need.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.