529 Plans

[keylime]

I have a question relating to the last semester of college. My understanding is that the student has to be a full-time student for 6 months to qualify as a dependent. My son did his final term, which ended in May, so he only was a student for 5 months. I used his 529 plan to cover his tuition and room and board, and the distribution came to me. I make too much to qualify for any tuition credits. Do I claim him as a dependent and not report the 529 disbursement? He went to work full-time after graduating and earned $31,000 in 2024.

Thanks very much!

[MinhT1]

Your son qualifies as a full time student if he is full time for 5 months or part months in 2024.

You can claim him as a dependent in 2024 if he's under 24.

For the 1099-Q, if the distribution is justified by his education expenses including room and board, you are not required to enter that form in your tax return. Just keep the form in your tax records together with your calculation showing that the distribution is for education expenses.

On form 1099-Q, instructions to the recipient read: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution.

[Hal_Al · Accepted solution]

The full time student rule is only 5 months, not 6. Graduating in May, even May 1st, counts.

In order to claim him as a dependent, he also needed to continue living with you past July 2 (more than half the year).*  Time away at college counts as time living with you. 

Q. Do I claim him as a dependent and not report the 529 disbursement? 

A. Yes.

Q. Do I not report the 529 disbursement, if he doesn't qualify as my dependent?

A. Yes. Because he is still the beneficiary of the plan.  The student does not have to be your dependent  for the 529 plan distribution to be qualified for tax free treatment.  The distribution only needs to be used to pay educational expenses for the plan beneficiary, dependent or not.  Technically, the beneficiary only had to have qualified expenses in the same year that a distribution was made (you didn't have to literally use THAT money to pay those expenses). 

*Can the student be claimed as a dependent in the Graduation year? 

If he/she was a student (under 24) for at least 5 months and lived with you for more than half the year, and did not provide more than 1/2 his own support for the whole year, you can still claim him. Be sure he knows you're claiming him, so he doesn't claim himself. He can only be claimed once. But, he can "file taxes" without claiming his own exemption.

The real question is who should be claiming him in this "transition" year to adulthood. You two have to agree on who is going to claim his exemption. Each should do their taxes both ways and see which way the family comes out best.  Even then, you have to meet the rules.  Since you don't qualify for the tuition credit, it's probably better if he claims it (up to $2500) and you forego the $500 dependent credit.  He can only claim it if he is not claimed as a dependent.

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test. Only a QC qualifies a taxpayer for the Earned Income Credit.

The rule is that a child of a taxpayer can still be a “Qualifying Child” dependent, regardless of his income, if:

1. he is a full-time student under 24 for at least 5 calendar months of the year (graduating in May usually means you meet the 5 month rule)
2. he did not provide more than 1/2 his own support  (scholarships are considered 3rd party support and not support provided by the student). 
3. lived with the parent (including time away at school) for more than half the year

So, it usually hinges on "Did he provide more than 1/2 his own support in 2024.

The support value of the home you provided is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants. IRS Publication 501 on page 20 has a worksheet that can be used to help with the support calculation. See: http://www.irs.gov/pub/irs-pdf/p501.pdf  (page 15)

[keylime]

Thank you so much for this very comprehensive reply! I really appreciate you taking the time to do it.

He lived in a rental house that we own and didn't pay rent for the first 7 months of the year, but he didn't live with us. It seems to me from your response that the best way to approach this is to not claim him as a dependent and to have him claim the tuition credit, and neither one of us reports the 529 income since it covered tuition paid in the year plus a small amount (definitely not market) towards his rent and utilities.

Please let me know if I understood that correctly or if he needs to claim the 529 distribution if he also claims the tuition credit.

Thanks again!

[Hal_Al]

It's still not clear if he lived with you for more than half the year.  The 4+ months living in the rental house, while in college, counts as living with you.  But yes, if he did not live with you for more than half the year, then he cannot be your dependent. 

In no case does he report the 529 distribution, on his return.  You are the recipient of the distribution and the 1099-Q. If any of it is taxable, it goes on your return. 

Yes, if he is not your dependent, he should claim the tuition credit. Even if he can be a dependent, you should forego claiming him (and the$500 dependent credit) to allow him to claim the credit. 

Before, when we said the 1099-Q did not need to be reported, that assumed nobody was claiming the credit.  The credit will "consume" $4000 of tuition.  If there are still enough expenses left to cover the box 1 amount on the 1099-Q (after subtracting $4000), then yes the 1099-Q does not have to be reported. 

Since you said you were not eligible for the credit, I'm assuming you didn't previously claim the American Opportunity Credit 4 times in the past. There's a 4 time limit. He would still be eligible for the Lifetime Learning credit, but the math isn't as generous, and we would have to look at the actual numbers.