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krk3384
Level 2

529 Non-Qualified Withdrawal on Dependent College Underclassman

My last child is a college underclassman and I will claim him as a dependent in 2020 and use the American Opportunity Tax credit in 2020 for $2000 in tuition payments that I've paid directly. His older siblings are out of college and the 529 balance left will more than cover his remaining college expenses. He will have about $20,000 in scholarships for 2020. 

 

I am wondering what would happen if I take a $9000 non-qualified distribution paid out to him. Approximately $5000 would be earnings. I am the 529 owner and he is the beneficiary.  He will likely have $2K - $3K in earned income from a summer job. 

 

Q: Would he file taxes separately even though he is a dependent and a college student? 

 

Q: If he does need to file separately does the $12,400 standard single exemption apply?

 

Q: Will the 10% non-qualified penalty apply since the distribution is less that his scholarships?

 

Q:  Would the 529 distribution count as income for the FAFSA? He does not have any financial need based on our EFC currently so I am not sure that it would hurt any.

 

2 Replies
NCperson
Level 15

529 Non-Qualified Withdrawal on Dependent College Underclassman

let me knock off the first two questions since they are easier 

 

Q: Would he file taxes separately even though he is a dependent and a college student?  YES

 

Q: If he does need to file separately does the $12,400 standard single exemption apply? 

 

For 2019, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,100 or the sum of $350 and the individual's earned income (not to exceed the regular standard deduction amount).

 

so it would be dependent on whether he has a job or not. 

Hal_Al
Level 15

529 Non-Qualified Withdrawal on Dependent College Underclassman

Q: Will the 10% non-qualified penalty apply since the distribution is less that his scholarships?

A.  No. Scholaarships are an exception

 

Q:  Would the 529 distribution count as income for the FAFSA? He does not have any financial need based on our EFC currently so I am not sure that it would hurt any.

A> The FAFSA people would have answer that

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