First, the 529 disbursements are not taxable income. 529 withdrawals are tax-free to the extent your child (or other account beneficiary) incurs qualified education expenses (QHEE) during the year. If you withdraw more than the QHEE, the excess is a non-qualified distribution.
In general:
All dependent children who earn more than $12,400 of income in 2020 must file a personal income tax return and might owe tax to the IRS. Earned income only applies to wages and salaries your child receives as a result of providing services to an employer, even if only through a part-time job.
The rules change when your child receives income from sources other than employment, such as interest and dividend payments. When the 2020 total of this type of income exceeds $1,100, then a return must be filed for your child.
If your child’s unearned income only consists of interest and dividends, then you can elect to include it on your own return and combine it with your income. Do this by completing IRS Form 8814 and attaching it to your personal tax return (TurboTax will do this for you).
See additional information here: https://www.irs.gov/taxtopics/tc553
Answers are correct to the best of my ability but do not constitute legal or tax advice.
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