Q. I think I should no longer claim him as a dependent. Is that correct?
A. No. Since you are the "owner" of the plan, not him, the support is considered to come from you (it's your money, not his). Actually, the answer is only probably no."The IRS has not given guidance on how distributions from Sec. 529 plans affect the support tests." Source: http://www.journalofaccountancy.com/issues/2012/mar/20114558.html
Q. I believe the unearned income may come back to me if I claim him as a dependent.
A. No. The unearned income will come back you, for tax purposes, if the distribution is sent to you. You have the option of having the plan administrator sent the money to either you or him*. So, if you want him to report the income, instruct the administrator to send the money to him. But, see the comment at the referenced link, where they suggest sending the money to you might strengthen your ability to claim him as a dependent.
* For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return. The recipient's name & SS# will be on the 1099-Q.
