@anonymouse1 on this one, the determination of whether the child is subject to Kiddie Tax has nothing to do with whether the child is claimed as a dependent.
<<Q. Or is she better off taking both scholarship amounts ($4000/semester in 2025) from the 529 and we'll claim her as a dependent on our taxes (meaning we'll get a $500 credit) though does that mean that the taxes on the "unqualified" 529 distribution will be taxed at our rate?>>
Please read the section "tax for certain children who have unearned income". Whether the parent decides to claim or not claim the child as a dependent (which is the parent's right), it doesn't change whether the child is subject to Kiddie Tax.
https://www.irs.gov/taxtopics/tc553
Kiddie Tax Rules:
- The child's unearned income was more than $2,600.
- The child meets one of the following age requirements:
- The child was under age 18 at the end of the tax year,
- The child was age 18 at the end of the tax year and didn't have earned income that was more than half of the child's support, or
- The child was a full-time student at least age 19 and under age 24 at the end of the tax year and the child didn't have earned income that was more than half of the child's support.
- At least one of the child's parents was alive at the end of the tax year.
- The child is required to file a tax return for the tax year.
- The child does not file a joint return for the tax year.
