You cannot "let" you college son claim independent. If he meets the rules to be a dependent, he must check the box that says he CAN be claimed as a dependent. He, almost certainly, meets the rules for being a dependent*. What you can do is forego claiming him to allow to claim him the AOC. But he can only claim it as a nonrefundable credit. At $17K of income, that's only going to be about $450, less than the Other Dependent Credit ($500) you lose.
Q. I withdrew from 529 plan to pay for his qualified college expenses and received 1099-Q with box 2 shows earning of $6000. So, I do not need to file this 1099-Q on our return?
A. Correct, if the distribution is fully covered by qualified expenses, including room and board.
Q. Then how does IRS know that the fund is being used for qualied expenses? I assume I have to maintain proper documents?
A. They don't, whether you enter it or not. 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. You are correct, you have to maintain adequate records, in case (unlikely) you are contacted by the IRS. Reports, in this forum, from people who have gotten CP2000 letters (including me) have indicated it's fairly simple to handle. I just gave em copies of the school billing statements. The number of reports of such notices have dropped off in the last two years.
*There are two types of dependents, "Qualifying Children"(QC) and Other ("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, student status, a relationship test and residence test.
A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
- He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
- He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
- He lived with the parent (including temporary absences such as away at school) for more than half the year
So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.
The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants. The 529 plan money counts as parental support.
The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf
See full dependent rules at: https://turbotax.intuit.com/tax-tools/tax-tips/Family/Rules-for-Claiming-a-Dependent-on-Your-Tax-Ret...
