The full time student rule is only 5 months, not 6. Graduating in May, even May 1st, counts.
In order to claim him as a dependent, he also needed to continue living with you past July 2 (more than half the year).* Time away at college counts as time living with you.
Q. Do I claim him as a dependent and not report the 529 disbursement?
A. Yes.
Q. Do I not report the 529 disbursement, if he doesn't qualify as my dependent?
A. Yes. Because he is still the beneficiary of the plan. The student does not have to be your dependent for the 529 plan distribution to be qualified for tax free treatment. The distribution only needs to be used to pay educational expenses for the plan beneficiary, dependent or not. Technically, the beneficiary only had to have qualified expenses in the same year that a distribution was made (you didn't have to literally use THAT money to pay those expenses).
*Can the student be claimed as a dependent in the 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. Since you don't qualify for the tuition credit, it's probably better if he claims it (up to $2500) and you forego the $500 dependent credit. He can only claim it if he is not claimed as a dependent.
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. Only a QC qualifies a taxpayer for the Earned Income Credit.
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 2024.
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 (page 15)
