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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
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Experience:  15years with H & R Block. Divisional leader, Instructor
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During 2011 my now 20 year-old daughter cashed some EE US savings

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During 2011 my now 20 year-old daughter cashed some EE US savings bonds. Her interest income from them was about 16 thousand dollars. Her entire income for that year including her wages was under 17 thousand dollars.

My daughter is a dependent on her's mother's tax return. Therefore my daughter's standard deduction is only 950 dollars and she has no personal exemption.

In April I was helping my daughter file her first ever tax return. We were using an on-line service and some of the questions were about her college expenses that were paid from her income. This looked like a separate issue from her not qualifying for her EE interest being tax exempt if it was used to pay for college.

We didn't have those expense figures handy. An extension was filed and an estimated tax payment was made.

These questions have come up in this matter:

Can my daughter's college expenses be used to reduce her tax liability for 2011? We'd like to know this before trying to gather all of those figures.

Some of my money earned from the bonds paid for medical expenses for my daughter. Would she be able to itemize deductions, using those medical expenses? Can she do that as a dependent on her mother's taxes?

While we were working on the tax return for my daughter, the application was calculating Alternative Minimum Tax. I would think at my daughter's income level the AMT wouldn't apply. If it matters, her at the time long-separated, now divorced, parents had a combined income of less that 80 thousand dollars for 2011. Does The AMT apply in addition to the regular tax?

Thank you for your help in this matter.

Robin D :

Hello and thank you for using Just Answer,
As a dependent your daughter cannot claim the education expenses. Your daughter can still itemize her deductions, even if claimed as a dependent. She can claim medical expenses (that are over 7.5% of her Adjusted Gross Income) that she paid for herself. If the money from the bonds was used for this and she is taxed on the bonds then she can use the medical.
It may be beneficial to look at itemizing for her if it will be greater than the standard deduction she gets to use.

The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the greater of:

  1. $950, or

  2. The individual's earned income for the year plus $300 (but not more than the regular standard deduction amount, generally $5,800).

    Alternative Minimum Tax is an additional tax.

Robin D :

SIzeable investments could trigger AMT even at your daughter's age. It is not age that counts but where the income came from and the amount. This simplifies it a bit, I know.

Robin D :

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I need some clarification on the AMT. As I understand it, the income earned from the savings bonds are taxable as regular income. Would the AMT cause a greater tax burden than would happen with regular income tax or in addition to regular income tax?

Robin D :

Yes, it could

Robin D :

You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
That is straight IRS talk. If you’re using tax software, it will calculate the AMT for you automatically. You’ll notice that if the AMT is lower than the regular tax, you don’t get the taxes lowered. You only get to see the AMT tax if you owe more.

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