529 distributions and support test / earned income

[jcverheijen]

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....

[Hal_Al · Accepted solution]

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.

[hchan1088]

Would the 529 distribution used to pay for education expenses count as the student support if the account was funded by parents and the student is the beneficiary?

Thanks

Helen

[Hal_Al]

Q. Would the 529 distribution used to pay for education expenses count as the student support if the account was funded by parents and the student is the beneficiary?

A.   No.  That is the most common situation; the 529 plan is funded by parents with the their child as student- beneficiary.  Since the parent is the owner, of the fund, the support is deemed to have come from the parent, not the student himself.

Actually, the answer is only probably no . The treatment of expenses paid with distributions from Sec. 529 plans and Coverdell ESAs in the support test is uncertain because of the dual nature of these college savings vehicles and a lack of IRS guidance. The consensus among tax experts is that it is parental support, because the parent is the owner of the plan.  

https://www.savingforcollege.com/articles/the-impact-of-529-plans-on-claiming-a-dependent

https://proconnect.intuit.com/community/tax-talk/discussion/529-plan-distribution-and-support-test/0...