Tax Year Prior to 2020: 1099 Q and dependent status

[ramraks]

Hello-

I received a 1099 Q for my son, who is a freshman. He spent 8 months at home last year. The 1099 Q lists him as the beneficiary.  All the proceeds from 529 plan mentioned on the 1099 Q were used for qualified expenses. If he had > $5000 in income as mentioned on the 1099 Q, can I still claim him as a dependent. If I do not claim him as a dependent, do he need to file a tax return? Thanks.

[KrisD15]

Yes, being at school is the same as living at home for tax purposes. (be sure to select "All year" for the months he lived at home when you enter him on your return in the "My Info" section) 

So if he is your son, he was a student under 24 in 2019 and he doesn't supply more than half his own support, he is your dependent and you claim him. 

If you are entering the 1099-Q, be sure to also enter the 1098-T that the school issued to the student. You might get an education credit. 

Even if he is your dependent, he might need to file a tax return, depending on his income.

If he does file, he needs to select "Someone else can claim me" and "Someone else will claim me" on his return. 

[NCperson]

one point of clarification.... whose social security number is on the 1099Q... THATs whose tax form the 1099Q goes on.  

whether your son needs to file a tax return is independent of whether he is your dependent.  Filing the tax return is dependent on his income and not whether he is your dependent. 

[Hal_Al]

"$5000 in income as mentioned on the 1099 Q".

There is no actual income shown on the 1099-Q. The "earnings" in box 2 are potentially taxable  if not used for qualified educational expenses. So. if he has no other income, he is not required to file a tax return, even if the 1099-Q is in his name and SS#.

Even though you may have used the 529 plan to pay all expenses, you may still claim a tuition credit  by paying a little tax on the distribution.  Read on for details.  

__________________________________________________________________________

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims 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 him 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. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
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. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

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.

[ramraks]

This is helpful. 

Is there a certain level of threshold income for the student beyond which he would be required to file an individual tax return?

[ramraks]

My son's name and SSN is listed on the 1099 Q. The "income"on the 1099-Q is over 10k and I wonder if with this amount of "income" from 529 plans if I can still claim him as a dependent and if this necessitates him to file an individual tax return.

[VictorW9]

No, it doesn't matter whether the 1099 Q is in your son's name (beneficiary) or your name (parent). It is usual for the beneficiary's name and social security to be on the 1099 Q. You can still claim your son's education credit in your tax return and him as a dependent.

[NCperson]

1) your child is still listed as your dependen

2) what is important on the 1099Q form is Box 1.   As long as the "qualified expenses" exceed Box 1, it doesn't need to be placed on your child's tax return.  In that case, Box 2 is tax free.   The form just get placed in your files.  

[Hal_Al]

Even if you did not use the 529 distribution for education and your son had to report the 1099-Q as income, he would still be your 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 (under 24 if  a full time student), a relationship test and residence test. Only a QC qualifies a taxpayer for the Earned Income Credit.

Further more, although the IRS has not issued formal guidelines, it is generally accepted that support from a 529 plan is considered as support provided by the parent, since the parent is the owner of the plan.

[ramraks]

Quick point of clarification. So, if he used all of the 529 distributions for tuition, room and board, he would not have any income. I was under the impression that the earnings (shown in Box 2 of 1099 Q) would count as income for tax purposes even if the funds were used for educational purposes. 

[Hal_Al]

Q.So, if he used all of the 529 distributions for tuition, room and board, he would not have any income.

A. Yes, that's correct.

Q. I was under the impression that the earnings (shown in Box 2 of 1099 Q) would count as income for tax purposes even if the funds were used for educational purposes. 

A. No. that's whole tax advantage of the 529 plan.  The contributions earned interest, dividends and capital gains  over the years. Then you get to take them out, tax free, as long as you use all the money (contributions and earning) for qualified educational expenses. The promise of tax free earnings, in the future, is the encouragement  to get people to save for college.

[VictorW9]

There is nothing for your son to report. As long as the distribution was spent toward qualified expenses of which, tuition, and room and board is, he doesn't have to do anything. Box 2 is of course earnings but because the money was used for qualified expenses, then it is not taxable. And you can still use your son as dependent and claim the deduction and he turn can still file his own tax return to get back any federal taxes withheld providing he does not claim his own personal exemption.

[ramraks]

So, if all the distributions were used for qualified expenses, he does not need to file a separate tax return. 

[VictorW9]

No he doesn't. It is normal for 1099 Qs to be issued in the beneficiaries name and social security number. No problem at all. However, if he earned money and have federal taxes withheld, he can choose to file and get back those federal taxes as refund but he's not obligated to file.

[Carl]

Here's some clarification on a few things.

 - Time spent away from home for the primary purpose of attending school is considered as having lived at home with the parents. So you *will* indicate the student lived with you "the whole year".

 -The undergraduate student's earnings *do* *not* *matter*. The student could earn a million dollars and still qualify as your dependent.

 - There is no requirement for the parents to provide the student any support. Not one single penny. The support requirement is on the student, and *ONLY* the student. That requirement reads:

 If the student did not provide more than 50% of the student's own support, then the parent's qualify to claim the student as a dependent on the parent's tax return"

Take note that scholarships, grants, 529 distrubitons, gifts from Aunt Mary, money from mom and dad, money the student found on the street, etc. is all considered third party support and *do* *not* *count* for the student providing their own support.

THere are only two possible ways the student can provide more than half of their own support.

     1) The student is self-employed or has a W-2 job and was paid sufficient funds to support their claim to providing more than half of their own support.

     2) The student is the *PRIMARY* borrower on a *qualified* student loan and sufficient funds were distributed to the student during the tax year to support their claim to providing more than half of their own support.

Now even with the above two, as an example the student could have earned a million dollars and still not justify providing more than half of their own support. For example, if their qualified education expenses for the year was say, $20,000 for example, yet they received $80,000 in scholarships, grants and 529 distributions, the $20K is applied to the qualified education expenses with the remaining $80K applied to support "before" the student's million dollar income is even considered for their own support. In this scenario, in order for the student to have provided more than half of their own support, they would have had to have paid "at least" $80K of their own money for support. There is no way on this green earth that you will ever convince the IRS that an "undergraduate" had to pay more than $160K to support themselves for the year, I don't care where on the planet you attended college.

Next, if the parent qualifies to claim the student as a dependent (and I'm sure you do qualify) then it does not matter if you actually claim the student or not. the student has no choice and must select the option for "I can be claimed on someone else's return". So the parent has a choice here. But the student flat out does not.