The question is, can my wife and I claim my 21 year old daughter, who is a college student, as a dependent, when over 50% of her support comes from a 529 plan that she owns, but which is comprised entirely of contributions from my wife and myself.
For some reason, when we established the 529 account, we apparently made my daughter the owner. This year, the majority of her support comes from 529 withdrawals, and she is the legal owner of the account. My first inclination is that we cannot claim her as a dependent, since we're no longer, technically, providing over 50% of her support. But the more I think about it, the less sense it makes. Those contributions came entirely from us. I would argue that we are still, in actuality, providing more than 50% of her support, since the primary source of her support (the 529 plan) is all money that we set aside for her over the years. However, I can't find any articles online that seem to address this issue. Does anyone have any insight into this?
I could not find a definitive article from the IRS or elsewhere supporting the claim that the parent who set up the 529 plan would by default be entitled to use it as support for the student. It would seem a logical conclusion that the student's control over disbursements from the fund would be an important factor. If the student had full control over disbursements from the account and the parent had little or no control, then the IRS may see contributions to the fund as a gift to the student, in which case disbursements would not be considered as coming from the student.
Here is an article that addresses the issue from The Tax Advisor. It does not draw firm conclusions, but it may help you in your deliberations: Dependency exemption issues for College students
It's an unusual situation and I don't think you're going to find a definitive answer. That said, I have a very strong opinion: she cannot be your dependent because she has provided more than half her own support. This is because she is the owner of the plan.
I base this opinion on two analogies:
1. The more common question is: is the support from a 529 plan, where the parent is the owner and the child-student the beneficiary, considered as provided by the student and thus keeps her from being the parent's dependent. Here's the answer: 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. So, it depends on who is the owner.
2. When a UTMA custodial account is used to pay for college expenses, the student is considered as having provided her own support, as it is now her money, even though it was the parents who originally funded the account. Naming her as owner of the 529 plan is the same thing.
Have her (as owner) talk to the plan administrator about changing the owner to you.