Son in College in Japan. Is he a dependent? What about his 529?

[khentschel]

Our son is attending a Language and Business College in Japan. He is 23. He left in March and has been attending the school full-time since then. We took money out of his 529 to pay tuition and fees, knowing that it is not a qualified school according to FAFSA, but that is where he wanted to go to college. Now we are having to figure out how to do the taxes on all of this. We have the following questions.

1.   Do we claim him as a dependent? He lived with us from January to March. He was working at the local hospital during that time so he will have income from that job, and he will be filing taxes for that.

2.   What to do about the 529?  We withdrew money from his 529 fund to pay for tuition knowing that it was not an accredited school. So now what? Do we file it as income? We have copies of the tuition payments (in yen), but no paperwork will come from the college. 

3.   Does the 529 payment go on our taxes or on his? The 529 payment was made out to him, but parents are listed on the account as well. 

4.  Any other advice on how best to deal with this situation?  Thank you so much for your help and advice.

[jtax]

I don't have definitive answers for you, but here are some resources to help you out.

Re: dependency. Much depends upon how much money your son made and who paid for his support. See

• https://www.irs.gov/publications/p501#en_US_2022_publink1000220708

interactive guide from the IRS:

• https://www.irs.gov/help/ita/whom-may-i-claim-as-a-dependent 

re: 529

See IRS Public 970, chapter 7: https://www.irs.gov/pub/irs-pdf/p970.pdf

In particular examples 1 and 2 on page 52 seem to say that the student (not the account owner) will pay any tax due on the distribution not the owner of the 529. That would probably be beneficial because the student will probably be in a lower bracket. I didn't know it worked this way. Presumably your son received a 1099-Q form in his name showing the distribution (not in your name).

Also note that the tax (and potential 10% penalty) is only on the gain/earnings withdrawn in excess of any qualified expenses. You never have to pay tax or penalty on the original contributions.

I hope this helps at least a little bit.