Statement (S):"assuming we use the first $4900 of 1098-T expenses to wipe out his share of the excess distribution he is not required to file a return"
Comment (C): I don't see how $4900 of expenses can wipe out taxable earnings an an $11,000 distribution
Q. On the other hand, it looks like if we get his total unearned income to $2600 or less (by allocating some of the excess distributions to his return) we avoid the kiddie tax - is this correct? In that case, he would file a return, monetize the entire standard deduction (ie, the remaining $425), and we'd maximize the amount of excess distribution taxed at his lower marginal tax rate without triggering the kiddie tax. Do I have this right?
A. Yes, basically. But, it's not exactly that you "allocate some of the excess distributions to his return". You allocate enough expenses (including room &board) to his 1099-Q that the taxable amount of the earnings calculates to $2575. This is a good plan, since you have to pay at the parent rate on either return (and maybe more on for 8615).
Q. Finally, if we do find ourselves in kiddie tax land: we maximize the excess distribution taxed at his lower rate but expose a bunch of his earned income to tax because his standard deduction drops to $1300. Do I also have this right?
A. No his standard deduction is $3250 ($2800 earned income + $450) regardless of the amount of unearned income added to his reportable income.
(S). I have to get acquainted with Form 8615 and await whatever other surprises it has in store for me.
(C). See lines 4 &5, in particular.
