Dependents Older Than 24

[renayys]

I'm trying to figure out the best way to file my father's and sister's tax return to maximize their credits and deductions. Some quickfacts on our situation:

- In 2021, my sister was a full-time student but was over the age of 24. She had zero wages but received a 1099-Q for 529 distributions

- She lived with my dad the entire year and he provides 100% of her support

- Our dad is divorced so his filing options are either Single or Head of Household

I initially filed my sister's tax return as a single taxpayer thinking, because she is older than 24, she no longer qualifies as a dependent. I also wanted her to receive the $1,400 rebate credit since she did not get one (previously was claimed as a dependent). Since her wages were zero and her $8,000 of 529 distributions were used for qualified tuition costs, her taxable income was zero and her refund was $1,400 for the rebate credit.

Now I am working on my dad's return and because he claimed her as a dependent previously, TurboTax goes through the questions of "let's see if ___ still qualifies as your dependent". One of the questions asked if she made more than $4,300 which I marked no (thinking the 1099-Q did not count as income) so even though she is older than 24, because she had zero income, she qualifies as a dependent. I'm wondering if I answered this correctly because her 1040 line 1 shows $8,000 because of the 1099-Q so that's above the $4,300 dependent threshold

Questions:

1. Do 1099-Q distributions count as earned income for my sister? If yes, she cannot be claimed as a dependent. If not, she can be claimed and my dad can claim Head of Household

2. Why didn't the Earned Income Credit generate for my sister's return?

3. Who claims any sort of education/AOTC credit (if anyone) on my sister's tuition?

[ColeenD3]

Questions:

1. Do 1099-Q distributions count as earned income for my sister? If yes, she cannot be claimed as a dependent. If not, she can be claimed and my dad can claim Head of Household. No, this is not earned income.

2. Why didn't the Earned Income Credit generate for my sister's return? Not earned income.

3. Who claims any sort of education/AOTC credit (if anyone) on my sister's tuition? If your father claims her, he gets the credit.

Income is not the only criteria. He would have had to provide over half of her support.

[Hal_Al]

Q.  I'm wondering if I answered this correctly because her 1040 line 1 shows $8,000 because of the 1099-Q.?

A.  You did something wrong.  None of the 1099-Q is taxable.  Delete the 1099-Q*.  Even when it is taxable, it does not go on line 1 of form 1040 and the box 1 amount is not the taxable amount.  

Q.  Do 1099-Q distributions count as earned income for my sister?

A.  No.  If not used for education, a portion of box 2 may be taxable as unearned income.  But not in this case.

Q.  If not, she can be claimed, as a dependent, and my dad can claim Head of Household?

A.  Yes, since she lives with him and is his dependent**.

Q. Why didn't the Earned Income Credit generate for my sister's return?

A.  She didn't have any earned income.

Q. Who claims any sort of education/AOTC credit (if anyone) on my sister's tuition?

A.  The father, since the student is his dependent. 

She will not get the $1400 Rebate recovery credit if she is a dependent, but your father will (if he didn't get it already, because she was his dependent in 2020).

*You can just not report the 1099-Q, at all, if the student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!  

**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 and student status test, a relationship test and a residence test. Only a QC qualifies a taxpayer for the Earned Income Credit and the Child Tax Credit. The Other dependent (qualifying relative) credit is worth (up to) $500 per dependent and is non-refundable.  That is, it can only be used to reduce an actual tax liability.

A person can still be a Qualifying relative dependent, if not a Qualifying Child, if he meets the 6 tests for claiming a dependent:

1. Closely Related OR live with the taxpayer ALL year
2. His/her gross taxable income for the year must be less than $4300 (2021).
3. The taxpayer must have provided more than 1/2 his support. Support from a 529 plan is considered to have come from the owner of the plan (usually the parent), not the student-beneficiary. 

In either case:

4. He must be a US citizen or resident of the US, Canada or Mexico
5. He must not file a joint return with his spouse or be claiming a dependent of his own
6. He must not be the qualifying child of another taxpayer

[renayys]

Thanks for the info! I figured the EIC did not generate because she had no earned income, but wanted to confirm that the 1099-Q was not earned income, in which case she would qualify as a dependent. He does provide 100% of her support so I guess my next question is:

1. Can I amend her 1040 through TurboTax to mark the "someone else can claim me as a dependent"? I believe I inputted her 1098-T information to offset the 1099-Q, so I'm not sure if that causes an issue because my dad would now claim the 1098-T if she's his dependent

2. I filed her return on February 26th and though she has not yet received her refund, it says it was accepted by the IRS. Not sure if that complicates things a bit more

[renayys]

Thanks for the info! I entered the 1099-Q under the 1099-Q section of TurboTax so I was confused why it showed up on Line 1. I should also mention that it says "Sch 5616" next to Line 1 on her 1040. None of the distribution was taxed because (I think) I entered her 1098-T info. How can I go back into the return and verify that I did? Either that or, because her income was less than the standard deduction, nothing ended up being taxed

[Hal_Al]

Q. Can I amend her 1040 through TurboTax to mark the "someone else can claim me as a dependent"?

A.  Yes. But don't amend until after her refund is received.  The father does not need to wait for her to amend before filing his return and claiming her and her tuition.

Q. I believe I inputted her 1098-T information to offset the 1099-Q.  Will  that causes an issue because my dad would now claim the 1098-T if she's his dependent?

A. No. The 1098-T is only an informational document and can be used on both returns. 

Q.  I entered the 1099-Q under the 1099-Q section of TurboTax so I was confused why it showed up on Line 1. I should also mention that it says "Sch 5616" next to Line 1 on her 1040.

A.  That's not the 1099-Q amount on line 1 of 1040.  It's $5616 of taxable scholarship and some other money, if it totals $8000. 

Q.  None of the distribution was taxed because (I think) I entered her 1098-T info. How can I go back into the return and verify that I did?

A.  Look at the student info worksheet for the calculations.  There may also be a 1099-Q worksheet.

Q. Because her income was less than the standard deduction, nothing ended up being taxed?

A. That's a possibility.  The taxable portion of a 1099-Q (if any) is never more than the amount in box 2 of the 1099-Q and shows up on line 8z of Schedule 1 and line 8 of form 1040. 

For more help provide more details:

Provide the following info for more specific help:

• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1098-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B charge for on campus students 
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Is the student an undergrad or grad student?