My son is no longer a dependent. His college costs on the 1098-T are in his name. 529 1099-q is in our name. Does he claim the 1098t on his taxes and we the 1099q?

[Hal_Al · Accepted solution]

Essentially, you claim both. An exception would be if the calculations result in some  taxable scholarships; that would go on his return.

It's complicated. You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses you claim for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.

But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets you an exclusion from the taxability of the earnings (interest) on the QTP. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. 
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. y.

 Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 

Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

  Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. It will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

[bieal4him]

I think I am in the same situation, but I did not understand the reply from @Hal_Al 

We, as parents, set up a 529 plan for our son's college.  This year, he earned enough money as a summer intern to no longer be our dependent, and filed his own taxes.  The school sent him (with his SSN) a 1098-T form for his tuition expenses.  He also took a withdrawl from the 529 plan for some of that tuition, but although the money went directly into his checking account to pay for tuition, the 529 plan administrator issued the 1099-Q form in my (parent's) name & SSN, since their policy is to issue the 1099-Q to the owner of the account unless a check is specifically made out to the beneficiary.  So, now I have a 1099-Q in my SSN, but the corresponding expense (1098-T) is in my son's SSN, and I am not claiming him as a dependent.  He already filed his taxes using the 1098-T.

The advice seems to indicate that I could simply not enter the 1099-Q data on my return, but this seems wrong?  Please help!

[Hal_Al]

"The advice seems to indicate that I could simply not enter the 1099-Q data on my return, but this seems wrong?"

On form 1099-Q, instructions to the recipient reads: "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." 

"This year, he earned enough money as a summer intern to no longer be our dependent, and filed his own taxes."

That's wrong (the conclusion may [probably not] be right, but the reason is wrong). 

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 considered third party support and not as support provided by the student.  529 plan money is considered as coming from the parent (the plan owner). 
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

So, 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.

Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12,200), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.  TT will check that box on form 1040.

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

If he/she has filed a return, claiming himself, he will need to file an amended return, unclaiming himself, so that you can claim him. You do not need to wait until his amended return is fully processed, to claim him on your return. But, you cannot e-file. You will have to mail in a paper return.

With the tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased.

[bieal4him]

Thanks @Hal_Al for the quick response!

A couple of followup questions:

  - It sounds like as long as I can show that the 1099-Q distribution went to his college tuition costs (paperwork if I ever get audited), that I could remove it from my TT forms, and thus not have it count as income for me?

 - You also mention that my son needs to re-file, listing that he CAN be a dependent.  If I choose to not claim him as a dependent, does he still need to do this?  It has personal significance to him to feel that he is independent, so I'd rather not push that issue unless it is required.

[Hal_Al]

Q.    I could remove the 1099-Q from my TT forms, and thus not have it count as income for me?

A.  Correct

Q.  - You also mention that my son needs to re-file, listing that he CAN be a dependent.  If I choose to not claim him as a dependent, does he still need to do this? 

A. Technically,  yes.  But as long as he doesn't try to cliam something he's not entitled to (the  most common being the refundable portion of the American Opportunity Credit), his taxes will come out the same either way