Does FAFSA dependency status affect exemptions on tax returns?

Question:

My daughter is in graduate school and files her own FAFSA as an independent student. When we (her parents) file our federal income tax returns, can we still claim her as a dependent or does she have to claim herself?

Answer:

Graduate students are automatically considered independent on the FAFSA (Free Application for Federal Student Aid). Parent information is not required on the FAFSA of an independent student, although some law schools and medical schools may require it for awarding their own financial aid funds. If an independent student voluntarily supplies parent information on his or her FAFSA, it will not affect the student’s eligibility for federal and state aid.

Dependency status on the FAFSA and dependency status on federal income tax returns are not the same. Dependency status on the FAFSA is defined by the Higher Education Act of 1965 while dependency status on federal income tax returns is defined by the Internal Revenue Code of 1986. Each statute has different rules.

A student can be independent on the FAFSA and still be claimed as an exemption on his or her parents’ federal income tax return, if he or she satisfies the IRS rules. The IRS rules include restrictions on the student’s age (under age 19 by the end of the tax year or under age 24 if he or she is a student) and income, in addition to requiring the parent(s) to provide more than half of the dependent’s support.

The IRS definition of support also differs from the definition used on the FAFSA. The IRS does not count scholarships received by a student in determining whether the student provided more than half of his or her own support. The FAFSA, on the other hand, does count scholarships and other student aid as part of the student’s support.

Similarly, whether a student is claimed as a dependent on his or her parents’ federal income tax returns generally does not affect whether the student is considered independent on the FAFSA.

(Incidentally, a student can be independent on his or her own FAFSA but still counted in household size and number in college on a sibling’s FAFSA, if the independent student’s parents provide more than half of his or her support during the award year.)