"We, the parents have a MAGI that exceeds the dependent credit."
The income limit for the tuition credit is $180,000. The income limit for the $500 Other Dependent Credit is $400,000.
Q. 1. Can we stop claiming him as a dependent on our taxes, even though he is a qualifying child as a full time student for most of the year and (I assume) he paid for less than half his own support?
A. Yes, you are allowed to do that. But there is (probably) nothing to gain. With the tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, he only qualifies for an education credit, if he is not a dependent.
While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out. A full time student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he supports himself by working. He cannot be supporting himself on student loans & grants and 529 plans and parental support.
If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit. The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable). Grad students are allowed to claim the AOTC if they got their BA/BS the same year (and the parents had not previously claimed it 4 times).
Q. Will that (529 distribution) be a problem for his taxes as he files on his own and does NOT check 'Can someone claim you as a dependent box ?
A. No. He must check that box. More importantly, if he was the recipient of the distribution and1099-Q, and some of it is taxable, it goes on his tax return regardless of his dependent status. The kiddie tax will still apply to any unearned income, including the taxable portion of 529 distributions (if he was the 1099-Q recipient).
Q. Shouldn't that question be 'Will someone claim you...'?
A. No. The 1040 form does not have that option. But the TurboTax interview does and will allow him to proceed to claim the tuition credit (that an actual dependent cannot claim).
His off campus rent and food are qualified expenses for the 529 distribution but are limited to the school's "allowance for dependence" (basically what on campus students pay).
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