All three of my sons are full time students in college - one is a junior and the other two are freshmen. While each of them can be claimed as dependents on my joint return with my wife, I am using TurboTax to prepare returns for each of them that assume that we will not be claiming them. None of the three provide more than half of their support with earned income. (I expect that it will make more sense for my wife and I to claim them. If so, these returns will be used as pro forma exercises to determine how much they would have received in Lifetime Learning Credits had we not claimed them; my wife and I will likely give each of them their respective amounts from our refund to use toward their schooling.)
For only two of my sons, TurboTax calculates a Lifetime Learning Credit amount. The crux of the issue appears to be the treatment of distributions from 529s that are attributable to earnings (Box 2 on the 1099-Q). For the freshman who is not getting the LLC, TurboTax does not include his 529 distribution attributable to earnings on Line 8 (Other income from Schedule 1) of his 1040. Because his earned income is low enough and his unearned income is negligible, his standard deduction is approximately $350 higher than his income. As such, his standard deduction exceeds his income so he shows $0 on Line 15 (Taxable income).
His twin brother's return, however, does include his 529 distribution attributable to earnings on Line 8, thus giving him positive Taxable Income and therefore eligibility for the LLC even though the two of them have similar earned and unearned income.
Their older brother has significantly higher earned income, so his standard deduction is the max of $12,550. So he has positive taxable income. However, what's curious is that his 529 distributions also don't appear on Line 8 and therefore don't contribute to his taxable income.
I get that each kid has his own unique set of facts and numbers, but the two freshmen in particular are so similar in their circumstances that I can't believe it's correct that one of them would qualify for hundreds of dollars in LLC and the other $0. Can anyone help me understand this (or indicate what I need to change in TurboTax to generate what I expect to be a correct result)?
Summary:
Junior -
Earned/unearned income: $18,000
1099-Q Box 2 (doesn't appear on Line 8): $5,300
Taxable income: $5,600
1098-T Box 1: $53,000; Box 5: $31,900
LLC: $558
Freshman 1:
Earned/unearned income: $3.300
1099-Q Box 2 (appears on Line 8): $3,200
Taxable income: $2,800
1098-T Box 1: $8,100; Box 5: $1,500
LLC: $282
Freshman 2:
Earned/unearned income: $5,400
1099-Q Box 2 (doesn't appear on Line 8): $4,100
Taxable income: $0
1098-T Box 1: $19,900; Box 5: $0 (He receives a private scholarship of $500/year which we report)
LLC: $0
