Q. However, TurboTax (TT) is saying that I have to claim him (or more specifically, he will be taxed at my rate) since he has no EARNED income. is this correct? is that the law?
A. Yes, TT is ONLY saying he will be taxed at your rate. Yes, that is correct and is the law. And, it is because of the unearned income. He cannot be your dependent because he provided more than half his own support. But, he is taxed at your rate because of the unearned income. Application of the "Kiddie tax" is not only related to being a dependent. A full time student, under 24, who does not get more than half his support, from his own earned income, is subject to the kiddie tax, even if is not and can not be a dependent.
Just because he has a lot of unearned income, does not mean he cannot be your dependent. It's not how much income he has, it's how that income is spent that counts. The money he puts back into savings and investments is not counted as support.
The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.
The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf
