529 Payments and Dependents

[CDQJr]

We pay our grandchildren's college expenses with our 529 plans.  The payments are more than half of their support.  Can we claim them as dependents on our Federal tax return?

[IsabellaG]

Not unless the grandchildren lived with you for more than half the year. A Qualifying Child, who is under 19 years old or under 24 and a full-time student, must have lived with you for more than 6 months in order to qualify as a dependent. Otherwise, the custodial parents would be the ones entitled to claim the dependent. It wouldn't matter how much support you paid.

An issue could arise if the 529 plan distributions are considered to be support provided by the child. In that case, the child could be considered to have provided more than half of their own support, and the parents would not be able to claim the dependent. See this discussion.  But if the grandchildren don't live with you, you can't claim them in any case.

[Hal_Al]

Q.  The payments are more than half of their support.  Can we claim them as dependents on our Federal tax return?

A. No.   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).  Th support test for a QC is not that the taxpayer (you) provided more than half his support, but that he didn't provide more than half his own support.  There is no income limit for a QC but there is an age limit & student status, a relationship test and residence test.  Since he is, most likely, the QC of his parents, he cannot be your dependent. 

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 (and grandparent 529 plans) 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

If, for some reason he does qualify as a QC dependent for his parent,  then maybe he can qualify as your dependent under the qualifying relative rules.

[Carl]

For starters, the only ones that can claim the student as a dependent is their parent or legal guardian.

Next, a 529 plan is considered third party support, and is "NOT" support provided to the student by the parent "or" the legal guardian.

Next, when it comes to claiming a student as a dependent, there is no requirement what-so-ever for the parent or legal guardian to provide any support. Not one single penny. The support requirement is on the student, and only the student. The requirement is as follows, paraphrased from IRS publication 970:

If the STUDENT did NOT provide more than half of the student's OWN SUPPORT, then the parents qualify to claim the student as a dependent on the parents tax return. Scholarships, grants, QTP/529 distributions *do* *not* *count* for the student providing their own support.

Basically, there are only two possible ways a student can provide more than half of their own support.

1) The student had a W-2 job or was self-employed during the year in which they are claiming to have provided more than half of their own support, and they made sufficient income in that year to justify having provided more than 50% of their own support.

2) The student was the *PRIMARY* borrowed on a qualified student loan, and sufficient funds were distributed to the student in the tax year they are claiming to have provided more than half of their own support, to actually justify a claim that the student provided more than half of their own support.

With that said, there are still situations where even if the student earned a million dollars, it would be physically impossible for them to provide more than half of their own support. For example, if the student received a total of $80,000 in scholarships, grants and 529 distributions, all of that is called "third party support". So even if the student earned a million dollars during the year, I seriously doubt any college student can justify it costing them more than $160,000 to support themselves for a year in college.

But overall, if you were not the legal guardian of the student for the last 6 months of the tax year, and if they did not live in your household for at least the last 6 months of the tax year, you can not claim them as your dependent.

Finally, in case it applies to you, if the student was living under your roof "AND" you were supporting that student 100% prior to July 1st 2019 and the "only reason" they are not living with you now is because they are away at college, then time spent away from home for the "PRIMARY PURPOSE" of attending school is considered to be time the student actually lived with you.