Q. If she derives more than half of her support from her own income plus distributions from a 529 plan, would she no longer qualify to be our dependent?
A. No. 529 distributions are considered parental support.*
Q. And would she then be able to claim the LLC?
A. If she is not your dependent, she would be eligible for the LLC. Actually, she's eligible now, if you don't claim her, even though you can.
If the student actually has a tax liability, there is a provision to allow him/her to claim a non-refundable tuition credit (LLC for grad students). But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit. The student must still indicate that he can be claimed as a dependent, on his return.
*The treatment of expenses paid with distributions from Sec. 529 plans and Coverdell ESAs in the support test is uncertain because of the dual nature of these college savings vehicles and a lack of IRS guidance. The consensus among tax experts is that it is parental support, because the parent is the owner of the plan. If you are going to try to claim it as student self support, would be helpful, to your case, to make distributions to the beneficiary or school, not the owner.
