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My child's qualified expenses get paid through a 529. I am the owner. I am not claiming her as a dependent on my taxes. Will the 529's distribution be taxable?

My child's qualified expenses for school get paid by a 529. I am the owner of the 529. If I don't claim her as a dependent on my taxes, will the earnings portion of the distribution be taxable to me?

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KrisD
Intuit Alumni

My child's qualified expenses get paid through a 529. I am the owner. I am not claiming her as a dependent on my taxes. Will the 529's distribution be taxable?

Yes and No. 

Since you are the owner of the 529 account, and you are making the distributions for another's (the beneficiary's) expenses, if the distribution is taxable, and/or if it is subject to the penalty tax, it will be taxable to you. 

The idea behind a 529 account is for an owner (parent) to contribute to an account that the beneficiary (student) uses for education expenses. When distributions are made by the student, or funds are transferred to the school, the 1099-Q will be issued to the student.  

A 1098-T is also issued in the student's name showing expenses paid, as well as scholarships. 

The 1098-T and the 1099-Q are entered into the program to calculated any education credits or taxable income. This is usually done on the parent's return first. If there is a credit, the parent gets that credit. If there is taxable income, it is claimed on the student's return. 

If the student is not your dependent, you will need to coordinate with the student so that any expenses you use against the distribution is not also used by the student for a credit. 

(If they use expenses for a credit, you will be taxed on the earnings, but you will not be charged the penalty tax, see below)

Below are the exception to the penalty tax on the distribution. 

Be sure that the student is eligible to be claiming themselves and that they are not, in fact, your dependent. 

Please use the link below for more information about claiming dependents.

https://turbotax.intuit.com/tax-tips/family/rules-for-claiming-a-dependent-on-your-tax-return/L8LODb...

In order to claim themselves, the student would need to supply more than half their own support. Student loans and scholarships are not included in the calculation for their support. 

According to the IRS:

“Generally, distributions are tax free if they aren't more than the beneficiary's adjusted qualified education expenses for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return.”

“Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income.

Exceptions. The 10% additional tax doesn't apply to the following distributions.

Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

Included in income because the designated beneficiary received:

A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

Veterans' educational assistance (see Veterans' Benefits in chapter 1);

Employer-provided educational assistance (see chapter 11); or

Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier)."

CLICK HERE for IRS Pub 970 Tax Benefits for Education

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3 Replies
KrisD
Intuit Alumni

My child's qualified expenses get paid through a 529. I am the owner. I am not claiming her as a dependent on my taxes. Will the 529's distribution be taxable?

Who takes the distribution, and therefore whose name is on the 1099-Q?  

My child's qualified expenses get paid through a 529. I am the owner. I am not claiming her as a dependent on my taxes. Will the 529's distribution be taxable?

My name is on the 1099Q.
KrisD
Intuit Alumni

My child's qualified expenses get paid through a 529. I am the owner. I am not claiming her as a dependent on my taxes. Will the 529's distribution be taxable?

Yes and No. 

Since you are the owner of the 529 account, and you are making the distributions for another's (the beneficiary's) expenses, if the distribution is taxable, and/or if it is subject to the penalty tax, it will be taxable to you. 

The idea behind a 529 account is for an owner (parent) to contribute to an account that the beneficiary (student) uses for education expenses. When distributions are made by the student, or funds are transferred to the school, the 1099-Q will be issued to the student.  

A 1098-T is also issued in the student's name showing expenses paid, as well as scholarships. 

The 1098-T and the 1099-Q are entered into the program to calculated any education credits or taxable income. This is usually done on the parent's return first. If there is a credit, the parent gets that credit. If there is taxable income, it is claimed on the student's return. 

If the student is not your dependent, you will need to coordinate with the student so that any expenses you use against the distribution is not also used by the student for a credit. 

(If they use expenses for a credit, you will be taxed on the earnings, but you will not be charged the penalty tax, see below)

Below are the exception to the penalty tax on the distribution. 

Be sure that the student is eligible to be claiming themselves and that they are not, in fact, your dependent. 

Please use the link below for more information about claiming dependents.

https://turbotax.intuit.com/tax-tips/family/rules-for-claiming-a-dependent-on-your-tax-return/L8LODb...

In order to claim themselves, the student would need to supply more than half their own support. Student loans and scholarships are not included in the calculation for their support. 

According to the IRS:

“Generally, distributions are tax free if they aren't more than the beneficiary's adjusted qualified education expenses for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return.”

“Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income.

Exceptions. The 10% additional tax doesn't apply to the following distributions.

Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

Included in income because the designated beneficiary received:

A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

Veterans' educational assistance (see Veterans' Benefits in chapter 1);

Employer-provided educational assistance (see chapter 11); or

Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier)."

CLICK HERE for IRS Pub 970 Tax Benefits for Education

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