Q. I'm wondering if I answered this correctly because her 1040 line 1 shows $8,000 because of the 1099-Q.?
A. You did something wrong. None of the 1099-Q is taxable. Delete the 1099-Q*. Even when it is taxable, it does not go on line 1 of form 1040 and the box 1 amount is not the taxable amount.
Q. Do 1099-Q distributions count as earned income for my sister?
A. No. If not used for education, a portion of box 2 may be taxable as unearned income. But not in this case.
Q. If not, she can be claimed, as a dependent, and my dad can claim Head of Household?
A. Yes, since she lives with him and is his dependent**.
Q. Why didn't the Earned Income Credit generate for my sister's return?
A. She didn't have any earned income.
Q. Who claims any sort of education/AOTC credit (if anyone) on my sister's tuition?
A. The father, since the student is his dependent.
She will not get the $1400 Rebate recovery credit if she is a dependent, but your father will (if he didn't get it already, because she was his dependent in 2020).
*You can just not report the 1099-Q, at all, if the student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. 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. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
**There are two types of dependents, "Qualifying Children"(QC) and Other ("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 and student status test, a relationship test and a residence test. Only a QC qualifies a taxpayer for the Earned Income Credit and the Child Tax Credit. The Other dependent (qualifying relative) credit is worth (up to) $500 per dependent and is non-refundable. That is, it can only be used to reduce an actual tax liability.
A person can still be a Qualifying relative dependent, if not a Qualifying Child, if he meets the 6 tests for claiming a dependent:
- Closely Related OR live with the taxpayer ALL year
- His/her gross taxable income for the year must be less than $4300 (2021).
- The taxpayer must have provided more than 1/2 his support. Support from a 529 plan is considered to have come from the owner of the plan (usually the parent), not the student-beneficiary.
In either case:
- He must be a US citizen or resident of the US, Canada or Mexico
- He must not file a joint return with his spouse or be claiming a dependent of his own
- He must not be the qualifying child of another taxpayer
