Hello Carl:
I thank you very much for your detailed responses. While it is VERY useful information, it is not addressing the specific question I have. May I try again, with an example, and see which end point I should arrive at in your figure/flow chart. The difficulty is your asking us to read everything LITERALLY and not "read between the lines". I fear I may have done that when I found one instance when you had included the 529 in "scholarships/grants/529 funds" but nowhere else. Was that a deliberate choice to use it in that one instance? Or did you just forget to include it in the other instances? Thus, a LITERAL interpretation would mean that if you left out 529 funds from various expressions, you were deliberate in your choice and meant it to be exactly as written. Am I correct in this interpretation?
So, instead of discussing each instance of "scholarship/grants" with and without "/529 funds" attached, and especially for the figure/flowchart, could I give you my real life situation and ask a few questions on where I end up in the flowchart?
I have paid my son's tuition, a few fees (none of a personal nature), books, dorm room and meal plan with a 529 plan distribution (me=owner, he=beneficiary). These are all 529 allowed items, as you well know, but not all are included in qualified education expenses for AOTC purposes.
I paid for these by asking the 529 plan to send a check to the school. I understand that this arrangement ensures that he is the recipient of the 1099-Q. I'm not sure that automatically means that he needs to file taxes on any potentially taxable earnings from the 529 distribution.
He get a tiny scholarship of 5K, and no other grants, while his tuition is about 40K. Except for that scholarship of 5K, I pay for everything else as indicated above.
He also has NO income of any sort, and would not be filing taxes under ordinary circumstances. It is only in conjunction with the possible use of the AOTC (or LLC) that the question of filing a tax return for him arises.
He meets all the criteria you have described for him to be a dependent - enrolled as an UG, enrolled at least half time, provides less than 50% of his support and we (parents) will claim him as a dependent. Thus, in the picture/flowchart we arrive at the box "Scholarship/grants do not cover all qualified education expenses".
Can you tell me, based on the data I've given about his scholarship compared to his tuition, which branch I should take? Note that the inclusion of the "/529" here would make me end up on exactly the opposite branch.
So is this a case where I have to read your diagram's text literally, or has the phrase "/529" been inadvertently been left off?
I apologize for going on and on about this, but I am not sure which path/branch to follow. What is the correct answer in my specific situation?
Thanks a LOT.
