Does 529 distribution count as parental support in the support test for a dependent?

[Hal_Al]

I haven't seen any discussion on that specific issue.

Then there's the other  issues;  with only $5-6K of income, he's unlikely to be able to use the non-refundable portion of the AOTC.  And there are restrictions on students claiming the refundable portion. 

Most students simply aren't eligible. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. You usually must have actually paid tuition, not had it paid by scholarships & grants. 

Reference: Line 7 instructions for form 8863. https://www.irs.gov/instructions/i8863

[wayward_son]

I have a more complicated situation. How does all of this work when multiple people support a student, but no one contributes more than half?

My son is 22 and in his fifth year of school (Engineering major). His income consists of an internship (~$12,000) and investment income (~$17,000). He also as an aunt who established a 529 that has been paying his tuition (~$14,000) and I have been paying his Room and Board (~11,500), some from my 529 but most out of pocket.  To further complicate things, the IRS worksheet is rather vague on what constitutes support.  Apparently, if he puts money away in savings, that’s not considered support? In any event:

1) Can I, and if so should I, claim him as a dependent? 

2) If I can’t, then can he take education deductions that I can’t?  I’ve taken 4 years of Opportunity Credit and make too much for the Lifetime Learning credit. Also, he will be able to take the standard education that he can’t if I claim him and become eligible for the Covid relief payments.

If I can, but do not, can he then claim all of this things? Or is he precluded from claiming these things because I potentially can? Or if no one can, because no contributed more than half his support, do I check no on his return even though he did not contribute more than half his own support?

[Hal_Al]

Q.  How does all of this work when multiple people support a student, but no one contributes more than half?

A.  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*. 

The support test is different for each type. The support test, for a QC, is only that the child didn't provide more than half his own support. The support test for a Qualifying Relative is that the taxpayer provided more than half the relative's support.

Q. 1) Can I, and if so should I, claim him as a dependent? 

A.  Probably not.  The numbers you provided appear to indicate that he provides more than half his own support (11,000 + 17,000 is more than $14,000 + 11,500).  But, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

Q. If I can’t, then can he take education deductions that I can’t? 

A. Yes, technically. But, probably not. Since the AOC has already been claimed 4 times, that only leaves the LLC, which is a non refundable credit.  And, if his tuition was paid by 529, you can't double dip.  But, the aunt can claim the 529 was used for room & board to reduce the taxable portion. It doesn't matter that your money went to R&B.  All that matters is that there was R&B expense in the same calendar year as the 529 withdrawal. The income limit for the LLC was raised, for 2021, and is the same as AOC.  He can take nearly the full $12,550 standard deduction whether he's a dependent or not, as the internship should be earned income $12,000 + 350 = 12,350 standard deduction). 

Q. Or is he precluded from claiming these things because I potentially can?

A. Technically yes.  But once the "does he provide more than half his own support" question is answered, that's moot.

Q. Do I check no on his return even though he did not contribute more than half his own support?

A.  No.  You check no only if he did provide more than half his own support.

*A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. He lived with the parent (including temporary absences such as away at school) for more than half the year