Whether the graduation is from high school or college, parents need to be aware that they may lose the dependent exemption for their graduate. There are a lot of factors involved in deciding if you can claim a dependent and being a full time student for at least 5 months of the year is one of those factors. A 2015 high school graduate who has been claimed on his parent’s return may not qualify as a dependent on their 2015 tax return. Whether they are continuing in school, their age, how much they will earn in 2015 and if they are living with their parents become issues to consider. The same factors need to be considered if the student is graduating for college. This is a time to talk to a tax pro.
A graduating student who you can no longer claim as a dependent may also mean that you are no long qualified for other tax benefits. If there are no other dependents, a single parent might lose their Head of Household status and have to file as Single. A graduate might also cause the parent to lose all or part of earned income credit.
Whoever is claiming the dependency exemption for the student, the parent or student, can expect that college graduation may cause the loss or reduction of the education credits which have reduced their tax liability in prior years. The exception may be a junior/community college graduate who transfers to a four year program.
The American Opportunity Credit only covers students for four tax years of qualified study. And the years have to be undergraduate years. After that time, the student may qualify for the Lifetime Learning Credit which is a smaller credit or no credit at all.
Student Loan Interest
As college graduates start to re-pay their student loans, they may be eligible for a deduction for the interest they pay each year on their student loans. The deduction is up to $2,500 a year on loans which were used to pay qualified higher education expenses like tuition and books. The deduction can’t be taken on a dependent return or if the taxpayer files Married Filing Separate. There is also a phase out of the deduction. For a non-married taxpayer, the deduction phases out between $$65,000 to 80,000 of modified adjusted gross income. Married Filing Joint taxpayers have a higher phase out of $130,000 to 160,000. The nice thing about this deduction is that it continues until that loan has been paid. The eligible student loan deduction is reported on line 18 on Form 1040A and Line 33 in the Form 1040 (2014).
If a new graduate (or anyone actually) moves for a job they may be able to deduct part of their moving expense. There are three tests to be met; closely related to the start of the work, distance and time. Form 3903 – Moving Expenses is used to document the move.
You have a year from the time you start a new job or job location to make the move. A graduate living in Home Town gets a job in Big City has a year to make the move. Or they can make to move to Big City without a job as long as they meet the time test. The old and new jobs don’t have to be related. So, a graduate working at a fast food place to help pay college expenses and gets an office job will qualify.
The new job has to be more than 50 miles away from the old home than the old job was. For example, you lived 15 miles from your old job. The new job is 80 miles away from the old home. The difference is 65 miles and you meet the distance test. However, if the old job was 40 miles from the old home the distance is only 40 miles and the distance test hasn’t been meet. Finally you have to work full time 39 weeks out of the first year after your move to meet the time test. There are exceptions to each test, especially for the military, so check with your tax pro about your specific situation.
If your move qualifies, you can deduct the cost of moving your household goods and up to 30 days of storage. You can also deduct the cost of travel and lodging. This is limited to one trip per person. You have the option of taking your actual expenses or use the set mileage rate of 23.5 cents a mile (for 2014) plus parking and toll. Meals are not deductible.
All the details and exceptions can be found in IRS Pub 521. And you might want to consider using Form 8822 – Change of Address about your new address.
So, graduates and parents of graduates don’t forget that, as with everything, there are tax issues to consider once you pick up that diploma. Good Luck!