paying rent with 529 funds

[Aliax]

My son had dropped out of college and started working. He is working for Disney, and is going to re-enroll in an online university. I have checked, and the school is valid for 529. His tuition will be fully covered by Disney. With the furlough, he will be going full time at least for a quarter, and possibly more. Because he is full time, he is no longer a dependent. With that background, can we still use the 529 towards his rent? I am not sure how his not being a dependent affects this, and also if only attending online impacts the ability to use the funds towards room expenses.

[DavidS127 · Accepted solution]

The 529 plan rules for 2019 tax returns are contained in the 8. Qualified Tuition Program (QTP) section of IRS Publication 970 Tax Benefits for Education. At that link, you'll find this definition of an Eligible Educational Institution and Qualified Higher Education Expenses:

Within the Qualified Higher Education Expenses section is the definition of room and board costs that qualify. Under this test, the room and board for an online student may not qualify, unless housing is available from the educational institution:

"3.  Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below).

The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

• The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
• The actual amount charged if the student is residing in housing owned or operated by the school.

You may need to contact the eligible educational institution for qualified room and board costs."

Because your son is not your dependent, he will report his education expenses and the 1099-Q on his tax return, not yours.

[Hal_Al]

I agree with DavidS127,  the 529 distribution does not qualify for rent, unless housing is available from the school.

Side issue:

"Because he is full time, he is no longer a dependent."

That's not correct.  He may not be a dependent, for other reasons, but not for being a full time student (or being a full time worker).  In fact, it's just the opposite; being a full time student is the primary qualifier for being a dependent.

There are two types of dependents, "Qualifying Children"(QC) and standard ("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. Only a QC qualifies a taxpayer for the Earned Income Credit.

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.
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

See full rules at: https://turbotax.intuit.com/tax-tools/tax-tips/Family/Rules-for-Claiming-a-Dependent-on-Your-Tax-Ret...

[Aliax]

Thanks I should have been clearer. He is not a dependent because he was working full time prior to the furloughs. So, effectively during the year he will have effectively been both a full time student and a full time worker.

[Carl]

Because he is full time, he is no longer a dependent.

That's not correct. He could work two full time jobs making a million dollars a year and still qualify as your dependent.

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If the student:

-Was under the age of 24 on Dec 31 of the tax year and;

-The **STUDENT** did **NOT** provide more than half of their own support for the **ENTIRE** year (scholarships, grants, 529 funds, gifts from Aunt Mary, money from mom and dad, etc. *DO* *NOT* *COUNT* for the student providing their own support) and;

-The student was enrolled as a full time student for *any* *one* *semester* that started in the tax year, and;

-The student was enrolled in a course of study that will lead to a degree or credentialed certification, and;

-The student was enrolled at an accredited university, then;

THE PARENTS QUALIFY TO CLAIM THE STUDENT AS A DEPENDENT ON THE PARENT'S TAX RETURN.

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Some things to note about the above.

 - The support requirement is on the student and **ONLY** the student

 - There is no requirement for the parents to provide the student any support - Not. One. Single. Penny.

 - There are only two possible ways the student can have any claim to providing more than half of their own support *for* *the* *entire* *tax* *year*.

1) The student was self-employed or had a W-2 job and earned sufficient amount to justify a claim to providing more than half of their support. One of the many requirements is that the student's income would need to exceed the total of all third party income (schoarships, grants, 529 funds, gifts, etc.).

2) the student is the *PRIMARY* borrower on a *qualified* student loan and sufficient money was distributed to the student during the tax year to justify a claim to providing more than half of their own support. The total distributed during the tax year would have to be more than that total of all third party income received by the student during the same tax year.

So chances are high that you the parent still qualify to claim the student as your dependent, and will continue to qualify for the 2020 tax year too.