Being 26 doesn't mean she can't be your dependent. It just means she can't be your "qualifying child".
There are two types of dependents, "Qualifying Children"(QC) and standard ("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.
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 (2020).
- The taxpayer must have provided more than 1/2 his support
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
If you are the owner of the 529 plan, that money is considered as support from you, not her, even though she is the beneficiary.
The taxability of a 529 distribution has nothing to do with whether the beneficiary is a dependent. As long as the money was spent on the beneficiary's educational expenses, it is considered a qualified (tax free) distribution. When the beneficiary is not a dependent; you enter the expenses immediately after entering the 1099-Q (entering is easier than when she is a dependent.
Or better yet, just don't enter the 1098-Q, at all. 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.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
