It depends. For 529 plans, there is an “owner”
(usually the parent), and a “beneficiary” (usually the student dependent). The
"recipient" of the 1099-Q can be either the owner or the beneficiary
depending on where the money was sent. When the money goes directly from the Qualified Tuition
Plan (QTP) to the school, the student is the
"recipient".
The 1099-Q gets reported on the recipient's
return. The recipient's name & SSN will be on the 1099-Q.
Even though the 1099-Q is going on the student's
return, the 1098-T should go on the parent's return, so you can claim the
education credit. You can do this because he is your dependent.
You can and should claim the tuition
credit before claiming the 529 plan earnings exclusion. The educational
expenses he claims for the 1099-Q should be reduced by the amount of
educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot
count the same tuition money, for the tuition credit, that gets him an exclusion from the
taxability of the earnings (interest) on the QTP. Since the credit is more
generous; use as much of the tuition as is needed for the credit and the rest
for the interest exclusion. Another special rule allows you to claim the
tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the
10% penalty is waived if he was unable to cover the withdrawal with educational
expenses either because he got scholarships or the expenses were used (by him or
the parents) to claim the credits. He'll have to pay tax on the earnings, at
his lower tax rate (not yours), but not the penalty.
Total qualified expenses
(including room & board) less amounts paid by scholarship less amounts used
to claim the Tuition credit equals the amount you can use to claim the earnings
exclusion on the 1099-Q.
Example:
$10,000 in educational
expenses(including room & board)
-$3000
paid by tax free scholarship
-$4000
used to claim the American Opportunity
credit
=$3000 Can be used against the 1099-Q (usually
on the student’s return)
Box
1
of the 1099-Q is $5000
Box
2
is $600
3000/5000=60% of the
earnings are tax free
60%x600= $360
You (or he) have $240 of taxable
income (600-360)
