Are cadets "students" for tax purpose? Also a question about "Saver's Credit" tax deduction.

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CGAparents

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Hi, I'm wondering if anyone here could help me with the following questions.

I was told that military academy cadets are not considered “students” for tax purpose, since they are “employees” of the US military with employee IDs. As a result, they could take advantage of Saver’s Credit - one of the eligibility criteria was that the person is not a "student".
But my accountant said she couldn't find an official IRS interpretation to prove that. So I'm wondering if anyone here has had experience with it.

In addition, with respect to Saver's Credit (https://www.irs.gov/retirement-plan...etirement-savings-contributions-savers-credit), it looks like the most they could get is 50% of $2000 for tax deduction. But I was also told they could get up to $6000 deduction so I'm wondering if there's some other deduction I'm not aware of.

Thanks if anyone has thoughts on this topic.
 
TONSSSS of debate and discussion about this. You can use the search function to read. Either drop your query into the search bar here, or a straight up Google search, looking for service academy forum.

Grab the popcorn 🍿 it’s a hotly debated subject!!

Bottom line advice: speak to a tax professional. Or 3.
 
justdoit19 said:
TONSSSS of debate and discussion about this. You can use the search function to read. Either drop your query into the search bar here, or a straight up Google search, looking for service academy forum.

Grab the popcorn 🍿 it’s a hotly debated subject!!

Bottom line advice: speak to a tax professional. Or 3.
Click to expand...
thanks will do. our tax accountant has no knowledge of this and she won't file anything related unless there's official interpretations.
 
justdoit19 said:
...

Bottom line advice: speak to a tax professional. Or 3.
Click to expand...

Whatever you do... ask an odd number. Asking an even number will likely result in a tie.

If the answer they select is "no", it is more than the savers credit now. Newer rules (starting last year?) for the EIC changed who was eligible without children, assuming they are 19.
 
Create a search string for Google which will do an external search focused on Service Academy Forums. As noted above, there are dozens of threads on this, with various viewpoint and professional/personal opinions noted. From my general observation over the years, it seems the most common pattern is the first year at service academies where the cadets and midshipmen are active duty and are paid a taxable salary, parents can still claim them as dependents. After that, the cadets and midshipmen file on their own, and they are off parental returns.

Try this search string, and yes, no space after the colon -

site:www.serviceacademyforums.com cadet midshipman income tax claiming dependent
 
In January the Academy will provide training to all cadets on how to complete their tax returns, providing official guidance.

FYI - Tax credits and tax deductions are different. Generally, cadets do not have significant earnings thus are in a low bracket so the Savers credit will be most useful.

In the past Academies have advised cadets not to file not as a dependent, and they encourage the cadets to open an Roth IRA as they are not yet eligible for the TSP and to use the Savers Credit to get the small amount of fed tax withheld from their earning refunded. The regular IRA would provide a tax deduction, but since their earnings are typically so low, there is no amount due to use the deduction to offset, so the Roth IRA is preferred. As always, everyone's tax situation is individual based on your unique circumstances.


Attached is the 2021 USMA Tax Guidance (2 PDFs) to discuss with your CPA.
 

Attachments

  • USMA Tax Tips for Parents 2021.pdf
    246.2 KB · Views: 35
  • USMA Tax Letter 2021.pdf
    144.5 KB · Views: 31
My answer to your question is a strong "No." Persons attending a SA are not considered students for tax purposes. I've gotten into some very heavy debates about this, and I will not get into another one. The bottom line is that you should never take tax advice on an anonymous forum. It's great to get ideas, but not concrete advice.

My son just got a letter saying he is potentially entitled to an EIC credit. The form sent by the IRS asks if he is a "specified student." Why can't the government talk normal like the rest of us? They say where to look for the definition of 'sepcified student,' and the term doesn't even appear on that webpage. I ended up figuring it out. It shouldn't be that difficult.

I wish once-and-for-all that the IRS would put it all in writing where members of SAs stand. There is no reason for any debate on this. Ir should be black-and-white.

Feel free to PM me when you are able if you want to know my reasoning.
 
brewmeist said:
My answer to your question is a strong "No." Persons attending a SA are not considered students for tax purposes. I've gotten into some very heavy debates about this, and I will not get into another one. The bottom line is that you should never take tax advice on an anonymous forum. It's great to get ideas, but not concrete advice.

My son just got a letter saying he is potentially entitled to an EIC credit. The form sent by the IRS asks if he is a "specified student." Why can't the government talk normal like the rest of us? They say where to look for the definition of 'sepcified student,' and the term doesn't even appear on that webpage. I ended up figuring it out. It shouldn't be that difficult.

I wish once-and-for-all that the IRS would put it all in writing where members of SAs stand. There is no reason for any debate on this. Ir should be black-and-white.

Feel free to PM me when you are able if you want to know my reasoning.
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Plus 3,000 to this!!!!

and the advice to get an odd number of opinions, or you may end up in a tie 😂
 
So hotly debated. I can only say my accountant said yes to plebe year as we provided more than 6 months residency for him and all room/board/medical etc., after that, he got USNA tax guidance in January of plebe year, and he filed for himself Youngster year and will do so for perpetuity.

I think we actually lost a SAF contributor who I miss over this topic.

I asked 3 tax specialists. Got 3 different answers, lol.
 
I considered myself not a student every year for my taxes, and claimed the saver's credit 3/4 (I didn't have an IRA my 4/c year). Most Cadets can be claimed as a dependent for 4/c year.
 
Heatherg21 said:
So hotly debated. I can only say my accountant said yes to plebe year as we provided more than 6 months residency for him and all room/board/medical etc., after that, he got USNA tax guidance in January of plebe year, and he filed for himself Youngster year and will do so for perpetuity.
...
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First, I am not an expert. Second, I think these responses might be answering only part of the question.
>6 months of support, etc is whether one can claim them as a dependent. (see #2 below)
5 Months of being enrolled at a school is whether they are considered a Student for IRS purposes. (see #3 below)

There are two tax credits possibly eligible for Cadet/MIDNs if they are not "students". (Savers credit and EIC) Students are not eligible until age 24 for EIC and not at all for Savers credit.

Almost all tax experts I asked agree that the plebe year, they are a student because they had 5 calendar months being in high school. This is separate from whether they are dependents and eligible for other tax situations. 3/C-1/C years are the ones where this question is heavily debated.

IRS.Gov lists this under the savers credit piece:

You're eligible for the credit if you're:
  1. Age 18 or older,
  2. Not claimed as a dependent on another person’s return, and
  3. Not a student.
You were a student if during any part of 5 calendar months of the tax year you:

  • Were enrolled as a full-time student at a school, or
  • Took a full-time, on-farm training course given by a school or a state, county, or local government agency.
A school includes technical, trade, and mechanical schools. It does not include on-the-job training courses, correspondence schools, or schools offering courses only through the Internet.

---

Its up to each taxpayer how to properly interpret whether the SAs count as schools or whether they are on-the-job training in order for Cadet/MIDNs to be considered students those last 3.5 years. I found tons of support/guidance one way or another for #2, but very little for #3. So, if anyone does find something definitive from IRS itself, I'd love to see it.
 
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To clarify, I would just add that if you read the USMA guidance letters (signed by a US Army JAG) attached above they reveal the following:

1. Dependent or not question:

"Dependent Exemption/Personal Exemption. Each year, the IRS rejects several first year (plebe) Cadets’ tax returns. This is the result of both the plebe and his/her parent(s) or guardian(s) claiming the same personal exemption. Many parent(s) or guardian(s) believe they can continue to claim their son or daughter while they are a full-time student. However, in order to claim a dependent, the taxpayer must be able to show that he/she provided more than half of the dependent’s support for the tax year. After totaling Cadet pay, food, education, and room and board, the Army provides Cadets with more than $40,000 per year. In most circumstances, the financial support a Cadet received from parent(s) or guardian(s) does not exceed this amount. Should you have any further questions regarding this matter, you may wish to consult independent legal counsel, IRS Publication 17, and/or the Internal Revenue Service (IRS). The IRS has eliminated the deduction for personal exemptions for 2020, but you will be taxed differently if you are claimed as a dependent on another’s tax return."

2. Savers Credit Question:

"Do not claim educational credits if the only education institution you have attended this tax-year is USMA. USMA falls under the Department of Defense and not the Department of Education. Therefore, Cadets cannot claim the American Opportunity Credit or Lifetime Learning Credit, for books and other education-related expenses."

The academy is not considered a college for tax purposes. They do not issue IRS 1098-T statements for tuition payments like colleges do. This is a common issue on these boards when it comes to claiming qualified (non taxable) costs as 529. The USMA guidance makes it clear that any draws from 529s will be taxable on the earnings portion as they are non-qualified draws, because the academy is not an educational institution in the eyes of the IRS. The USMA guidance makes it clear the usual tax breaks for college are not applicable further reinforcing the view that this is not college. If it is not a college, then they are not a student and therefore, they are eligible for the savers credit.

Bottom line, each can do as they wish and this is a complex area. However, viewing this trough the lens of explaining your position in an very unlikely tax audit, I personally would follow the written USMA guidance from the Academy and their legal opinion and use those letters as support of the position with the IRS. Most CPAs would welcome the USMA guidance, and lacking any definitive IRS opinion, would use it.

I hope this helps everyone is some small way.

I think the USMA letters are very helpful and am trying to increase the awareness of them.
 
Heatherg21 said:
as we provided more than 6 months residency for him
Click to expand...

justme said:
>6 months of support, etc is whether one can claim them as a dependent.
Click to expand...
The IRS is not looking at how much time a child has lived at home to determine support/dependency. When they say 50%, they are looking at dollars spent, not time. I see this quite often as the reason why parents claim their child as a dependent their Plebe year, since the child had lived at home the first 6 months of that year. The time doesn't matter. It is all about the $.
 
The 529 payments don’t qualify because the expenditures aren’t for tuition and books, not because it isn’t a college. Clearly they get bachelor degrees.

The amounts paid for tuition aren’t paid by either the child or the parent. The worksheet doesn’t look at what the army pays. They look at what the parent vs the child pays. Neither pays tuition.

The IRS special agent told this to me as a CPA - and that either the child or the parent can claim the exemption. I wish they would issue an opinion on it to end this discussion.

Listen to your tax preparer. Most would claim it either way the client wants. The tax code isn’t rigid like the military. Has anyone claimed an exemption that was thrown out on audit? I highly doubt it.
 
brewmeist said:
The IRS is not looking at how much time a child has lived at home to determine support/dependency. When they say 50%, they are looking at dollars spent, not time. I see this quite often as the reason why parents claim their child as a dependent their Plebe year, since the child had lived at home the first 6 months of that year. The time doesn't matter. It is all about the $.
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I totally get not the living at home part. Just not a pure dollars equation.

If parents paid 100% for Richmond Moneybags IV's expenses while he lived in the Waldorf for January, and then he supported himself the other 11 months at typical 20 year old's budget, I dont see how they can say they supported him for more than half the year, even though they likely spent more money in support that one month than he did the rest of the year. That is likely a bad example, but the point should remain that dollars in a minority part of the year could be greater than the majority part of non-support.
 
brewmeist said:
The IRS is not looking at how much time a child has lived at home to determine support/dependency. When they say 50%, they are looking at dollars spent, not time. I see this quite often as the reason why parents claim their child as a dependent their Plebe year, since the child had lived at home the first 6 months of that year. The time doesn't matter. It is all about the $.
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Totally agree. I know we spent money on him during those six months. I just worded it poorly.
 
A1Janitor said:
The 529 payments don’t qualify because the expenditures aren’t for tuition and books, not because it isn’t a college. Clearly they get bachelor degrees.

The amounts paid for tuition aren’t paid by either the child or the parent. The worksheet doesn’t look at what the army pays. They look at what the parent vs the child pays. Neither pays tuition.

The IRS special agent told this to me as a CPA - and that either the child or the parent can claim the exemption. I wish they would issue an opinion on it to end this discussion.

Listen to your tax preparer. Most would claim it either way the client wants. The tax code isn’t rigid like the military. Has anyone claimed an exemption that was thrown out on audit? I highly doubt it.
Click to expand...
Almost didn’t recognize you, @A1Janitor!

Welcome back!
 
Haveaniceday said:
In January the Academy will provide training to all cadets on how to complete their tax returns, providing official guidance.

FYI - Tax credits and tax deductions are different. Generally, cadets do not have significant earnings thus are in a low bracket so the Savers credit will be most useful.

In the past Academies have advised cadets not to file not as a dependent, and they encourage the cadets to open an Roth IRA as they are not yet eligible for the TSP and to use the Savers Credit to get the small amount of fed tax withheld from their earning refunded. The regular IRA would provide a tax deduction, but since their earnings are typically so low, there is no amount due to use the deduction to offset, so the Roth IRA is preferred. As always, everyone's tax situation is individual based on your unique circumstances.


Attached is the 2021 USMA Tax Guidance (2 PDFs) to discuss with your CPA.
Click to expand...
thank you so much for this - will read them!
 
Haveaniceday said:
In January the Academy will provide training to all cadets on how to complete their tax returns, providing official guidance.

FYI - Tax credits and tax deductions are different. Generally, cadets do not have significant earnings thus are in a low bracket so the Savers credit will be most useful.

In the past Academies have advised cadets not to file not as a dependent, and they encourage the cadets to open an Roth IRA as they are not yet eligible for the TSP and to use the Savers Credit to get the small amount of fed tax withheld from their earning refunded. The regular IRA would provide a tax deduction, but since their earnings are typically so low, there is no amount due to use the deduction to offset, so the Roth IRA is preferred. As always, everyone's tax situation is individual based on your unique circumstances.


Attached is the 2021 USMA Tax Guidance (2 PDFs) to discuss with your CPA.
Click to expand...
justme said:
Whatever you do... ask an odd number. Asking an even number will likely result in a tie.

If the answer they select is "no", it is more than the savers credit now. Newer rules (starting last year?) for the EIC changed who was eligible without children, assuming they are 19.
Click to expand...
didn't know about the EIC, will check it out thanks!
 
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