Solved: 529 distributions and support test / earned income
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jcverheijen
Level 1

529 distributions and support test / earned income

My daughter has funded her own 529 plan and is now in college. She uses her 529 distributions for the majority of her support (70%) with 20% of her support coming from a part time job and 10% being provided by her parents.

 

She files her own taxes and cannot be claimed by us as a dependent (since 90% of her support came from her own sources). 

 

In order to determine whether she gets a refundable or non-refundable education credit, she needs to indicate if less than half her support was from earned income. Do we consider only her 20% support from the part time job (ie <50%), do we consider both 529 and part time job as earned income (90%, ie >50%)?

 

Or do we ignore the 529 distributions and only consider the remaining 30% as support for this AOTC credit (in which case more than 50% was from earned income)? This would not seem right since we have to account for 529 distributions in the support test for dependent status. 

 

I am leaning to the first scenario: only the part time job counts as earned income so the AOTC will be non-refundable but that would suggest that working to pay for college before you enroll is less beneficial than working while you are enrolled....

1 Best answer

Accepted Solutions
Hal_Al
Level 15

529 distributions and support test / earned income

She is not eligible for the refundable portion of the AOTC because she is a fulltime student, under 24, with less than half her own support coming for earned income.

 

Even though none of the 529 plan distribution is taxable, and therefore not "income", it is still "support"; just like money from a bank account.

 

Your conclusion is correct: you have to account for 529 distributions in the support test for dependent status and the support test for the refundable portion of the AOTC.

View solution in original post

1 Reply
Hal_Al
Level 15

529 distributions and support test / earned income

She is not eligible for the refundable portion of the AOTC because she is a fulltime student, under 24, with less than half her own support coming for earned income.

 

Even though none of the 529 plan distribution is taxable, and therefore not "income", it is still "support"; just like money from a bank account.

 

Your conclusion is correct: you have to account for 529 distributions in the support test for dependent status and the support test for the refundable portion of the AOTC.

View solution in original post

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