Q. 1. Is the above assumption correct (he will have to claim himself as dependent, and I will have to file an amendment )?
A.1. Most likely, but it is possible that he is still your dependent. See below. The 529 money is considered parental support because you are the plan owner.
Q. 2. If the above is true, will he have to provide the 1099 info on his return, even though he had no participation in the sum being provided?
A. 2. He (if anybody) has to report the 1099-Q, regardless of dependent status, because he is the "recipient" (his SS# on the form). But see Q.3.
Q. 3. Is he expected to pay taxes on any of the amount provided into his school?
A. 3. No. At most, a portion of the amount in box 2 (not box 1) may be taxable. But, most likely none is taxable. He can just not report the 1099-Q, at all, if the student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. 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. For details, see long discussion, above.
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Graduation year
If he/she was a student (under 24) for at least 5 months and lived with you for more than half the year, and did not provide more than 1/2 his own support for the whole year, you can still claim him. Be sure he knows you're claiming him, so he doesn't claim himself. He can only be claimed once. But, he can "file taxes" without claiming his own exemption.
The real question is who should be claiming him in this "transition" year to adulthood. You two have to agree on who is going to claim his exemption. Each should do their taxes both ways and see which way the family comes out best. Even then, you have to meet the rules. The rule is that a child of a taxpayer can still be a “Qualifying Child” dependent, regardless of his income, if:
- he is a full time student under 24 for at least 5 calendar months of the year (graduating in May usually means you meet the 5 month rule)
- he did not provide more than 1/2 his own support (scholarships are considered 3rd party support and not support provided by the student).
- lived with the parent (including time away at school) for more than half the year
So, it usually hinges on "Did he provide more than 1/2 his own support in 2021.
The support value of the home you provided is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants. IRS Publication 501 on page 20 has a worksheet that can be used to help with the support calculation. See: http://www.irs.gov/pub/irs-pdf/p501.pdf pg 15
