Q. My student isn't otherwise required to file a tax return. If I kept the 529 disbursements low enough that he has no "unearned income" to declare from the 529, he needn't file a return with the IRS. Right?
A. Yes. The filing threshold for a full time student-dependent, is $1100 of unearned income.
But, there's a better way. Scholarship income is also unearned income. But, scholarship income is treated as earned income, for the purpose of calculating a dependent's standard deduction. So, if the student declares his $10,000 scholarship as taxable income, he can then claim the education expenses, not used by the parent for the tuition credit, as covered by the 529 plan distribution and none of the distribution is taxable. It's a perfectly legal loop hole, unless the conditions of the scholarship are that it be used to pay for qualified expenses. A dependent's standard deduction is limited to $1100 or his earned income + $350 (but not more than $12,400).
Technically, the student still doesn't need to file a tax return Bit you may want to have him file to document the reporting of the scholarship as income.
