Can I claim college students as dependents if majority of financial support is tuition/room & board funded by 529s owned by grandparents or UTMA-529?

[Anonymous]

Student #1 is over 25, full-time grad student, part-time income <$4000.  We pay rent & food, 25k tuition paid by grandparent-owned 529.

Student #2 is under 19, full-time undergrad, part-time income >$6000.  Of tuition +R&B costs, we paid 4k and rest ($30k) paid from custodial 529 (parent custodian FBO student, established with UTMA $).

In both cases, 529 distribution checks were payable to student, who endorsed to parent, who deposited and wrote checks to schools.

And, if students were between ages 19-24, would this make any difference in outcome?

[Opus 17 · Accepted solution]

The 19 year old is your qualifying child dependent if,

1. he lives with you more than half the year except for temporary absences (being away at college is considered a temporary absence and the child is deemed to live with if they would have lived with except for college).

2. the child does not pay more than half his own support.

A person's support includes rent (or the fair rental value if they live free in someone else's home) , food, clothing, entertainment, travel and education expenses.  Because the child paid expenses from an account that the child owns (even if it was funded by others, it is now owned by the child) that is support the child pays for themself.  However, you can take credit for room and board you provide while the child lives in your home over the summer.  Since the child lives in your home all year for tax purposes (assuming this is true and not a divorce situation, and assuming you really do maintain a home for them in your home) you can probably take credit for providing them with rent and utilities for the whole year.  That may drive up the child's total living expenses high enough that the amount paid from the child's funds ends up less than half.  If not, they are not your dependent.  There is a worksheet in publication 501 to help figure this out.  https://www.irs.gov/uac/about-publication-501

Child #1 is too old to be a qualifying child dependent but can be a qualifying relative dependent if 

1. they earn less than $4000 of taxable income 

2. and you provide more than half of their total support.  

Again, you must add up all the child's support costs (rent, food, travel, entertainment, education, etc.) and figure out how much is paid by the child, by you, and by the grandparents.  If you provide more than half the support, you can claim the child as a dependent.  If the grandparents provide more than half, they can claim the child as a dependent.  If no one pays more than half, then anyone who pays at least 10% of support can claim the child as a dependent if they get a signed multiple support agreement from everyone else who also pays more than 10% of the support.  If no one pays more than half and there is no signed MSA, then no one can claim the child as a dependent.

[SweetieJean]

Will student #1 still eb UNDER age 19 on 12/31/2016?

[Opus 17]

As long as the child is a full time student (for 5 or more months of the year) and under the age of 24 on December 31 of the tax year (age 23 or less) then both the qualifying child and qualifying relative rules can be used.  Once the child turns 24, even if they are still a student, only the qualifying relative rules apply (unless they are totally and permanently disabled).

[Anonymous]

yes, student will still be under age 19 a/o 12/31/16.

[kennethelam13]

fs

[Hal_Al]

Money from a UTMA/UGMA account is considered support provided by the student, as it is legally his/her money.

Money from a 529 plan is considered support provided by the owner  of the plan, usually the parent, but could be a grandparent. 

Actually, 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.  It would be helpful, to your case, to make distributions to the owner, not the beneficiary (student) or school.

References:

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...

[ellaimbo]

Hi, is there any update to this, ideally and ruling from the IRS? it is actually advantageous for me to have my children not be dependents and allow the 529 money they use to be counted as the principal determinant of how they fund their expenses. Welcome your comments. Tx!