It does not matter how much income you have, earned or unearned, for the dependency test. There are two types of dependents, "Qualifying Children"(QC) and
standard ("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 & student test.
A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:
1. 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
2. He did not provide more than 1/2 his own support. Scholarships are
considered third party support and not as support provided by the student.
3. 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 him
self. The support value of the home the taxpayer provides is the fair market rental value
of the home plus utilities & other expenses divided by the number of
occupants.
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The contradicting things, you heard about the unearned income of a student-dependent may be regarding a separate (from dependency) issue known as the kiddie tax. It essentially says that unearned income over $2100 will be taxed at the parents tax rate, but on the students return.
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If you are her dependent, she can file as Head of Household. It's essentially (but not exactly) the same support rule.
