Q. Can I still withdraw funds tax free from 529 even though he paid for it?
A. Yes, since he is the beneficiary of the plan. It is not necessary that any of the 529 plan money pay for the actual tuition and other expenses. It is only necessary that he incurred qualified expenses (including room & board) in the same year as you made the withdrawal.
Q. Can he still take American Opportunity credit (AOC) if he files his returns?
A. Maybe. If he is over age 23, then yes. A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. He cannot be supporting himself on parental support, 529 plans or student loans & grants. More than half his support must come from earned income in order to claim the Refundable portion of the AOC. If he does not qualify as your dependent, he can claim the non refundable portion of the AOC. You will have to coordinate your taxes. You may not claim the same expenses that he uses for the AOC, to claim the 529 plan earnings exclusion (see example below*).
Q. It seems I can't claim him as dependent. Is that right?
A. Maybe. A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
- He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
- He did not provide more than 1/2 his own support. Scholarships (but not loans)are considered third party support and not as support provided by the student. 529 plan money is considered as provided by the parent, if the parent is the owner.
- He lived with the parent (including temporary absences such as away at school) for more than half the year
So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.
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.
Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12.000), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section. TT will check that box on form 1040.
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*Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the 529 Plan earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000 used to claim the American Opportunity credit (on the student's return, in your case)
=$3000 Can be used against the 1099-Q ( on the parent’s return)
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
