Q. So I need to file a separate return for son, and still claim him as dependent on my return?
A. Correct
Q. I guess I should also try entering the income with me as recipient and compare to him as recipient and see which way pays more tax.
A. Yes, Generally, the tax will be less if the student reports the income, even with the kiddie tax. But, there are enough idiosyncrasies in the tax rules, that the smart thing is to compare, in advance of making the decision on how to take the distribution.
Q. How does the penalty work? Is it 10% of the gain on the non-qualified withdraw, or is it 10% of the tax owed?
A. It is 10% of the taxable portion of the withdraw. In the example above, that would be 10% x $3333 = $333
