Q. If Child 1 is claiming themselves and parent doesn't claim them as a dependent, then Child 1 can use the 1098-T education expenses on their return, instead of parents, correct?
A. Basically yes. But there are restrictions on a student under 24 claiming the refundable portion of the AOC. He must support himself by working. Note that in order for the student to claim even the non refundable credit, the parent must actually not claim the student as a dependent, and forego the $500 other dependent credit.
Q. If parents claim Child 1, then the parents would include the 1098-T education expenses on their return, correct?
A. No, if the parents income is too high, the 1098-T goes to waste.
Q. Since the distribution was not used by the beneficiary (Child 2), the earnings are now taxable, and a 10% penalty is owed, correct?
A. Yes, except if child 2 was also in college. It is not necessary that the distribution actually pay for his education. It's only necessary that he have college expenses in the same year as the distribution.
Q. Whose tax return reports the income? Child 2, or the parents? If Child 2 reports it, then Kiddie Tax kicks in.
A. Child 2. His SS# is on the 1099-Q. He is the recipient. Yes, the distribution is subject to the kiddie tax.
PS. Bad move sending Child 2 529 distribution directly to Child 1's school.
@Accountant01
