Room and board, books and a computer are qualified expenses for a 529 plan distribution. So, it's probable that the parents can claim most of the $8250 of tuition for the Lifetime Learning Credit (LLC). They should probably claim all of the $8250 for the LLC, even if it means the student pays a little tax on the 529 earnings (the 10% penalty is waived in this situation).
As to the dependency issue, she probably qualifies as your dependent, but it may be necessary (but probably not) to run the support calculation.
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.
The support test is different for each type. The support test, for a QC, is only that the child didn't provide more than half his own support. The support test for a Qualifying Relative is that the taxpayer provided more than half the relative's support.
A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
- He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
- He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
- He lived with the parent (including temporary absences such as away at school) for more than half the year
So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on himself.
The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants. Support from a 529 plan, where the parent is the owner, is considered as coming form the parent, not the student-beneficiary.
The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf
With the 2018 tax law change, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, she only qualify for an education credit, if she is not a dependent.
