File as dependent or independent for full time student when parent AGI is high, 1099-Q and 1098-T

[999eezz888]

My son is a full time student with earned income $17k last year, no scholarship.

Our AGI is too high to claim American opportunity tax credit.

529 Plan issued 1099-Q, Parent is Recipient, all proceeds paid for his qualifying college expenses.

--Planning to let my son file independently so he can qualify for AOLC, is this the right move for us?

--We will not include 1099-Q in our tax return since all distribution being used for qualifying expenses. Is this correct?

--My son also doesn't need to include 1099-Q since he is not the recipient on the the form. Is this correct?

For him to file independently, he will report 1098-T and his tax questions answers are .....Please advise if these are correct.

--Yes, to someone can claim him

--No, to someone will not claim him

--he paid for over half of his support, should he answer YES or NO? or does it matter?

Anything else that we need to pay attention to?

[ColeenD3]

No. If he is a dependent, you can't just let him file as an independent person so he can get a credit he is not entitled to. As far as support goes, you have to look at every dollar you have spent vs every dollar he has spent, that went towards his support. The IRS has a worksheet.

There is a common idea that a parent can decide not to claim a dependent so that they can reap certain benefits. The truth is, a qualifying child or a qualifying relative is your dependent. 

While the IRS never comes out and says that you must claim a dependent, they do give the definition of who is a dependent.

The term “dependent” means:

• A qualifying child, or
• A qualifying relative.

While you can choose not to claim your dependent, the qualifying person MUST indicate on his own return that he is a dependent, but that no one will actually claim him as such.

In TurboTax Online, the questions read:

Someone else can claim me as a dependent on their tax return. You would answer yes.

And this person will claim me on their 2021 tax return. You would answer no.

Sometimes a parent will not be able to take advantage of an Education Credit and will forgo claiming the dependent so that they can get the credit. This will not necessarily work out. A student, under the age of 24, must have a tax liability in order to claim the non-refundable portion of the credit.

When using the ITA that the IRS provides, you can be told that you are eligible, but can't take the refundable portion in any of the following circumstances.

You are eligible to claim the American Opportunity Credit.

However, you cannot claim any part of the American Opportunity Credit as a refundable credit on your tax return since:

• you were over age 18 and under age 24 at the end of 2021,
• you were a full-time student,
• your earned income was less than one-half of your support,
• at least one of your parents was alive at the end of 2021, and
• you are not filing a joint return.

[Hal_Al]

Q. -Planning to let my son file independently so he can qualify for AOC, is this the right move for us?

A.  Yes, and no. As explained by @ColeenD3  and at your other post

(https://ttlc.intuit.com/community/college-education/discussion/re-the-parent-of-the-dependent-files-... ), filing independently is not optional.  But, you can forgo claiming him, but he still can't claim himself or the refundable portion of the AOC.  But then he can claim the non refundable credit (up to his tax liability)

Q. We will not include 1099-Q in our tax return since all distribution being used for qualifying expenses. Is this correct?

A.  Yes, Details at your other post.  

-Q. My son also doesn't need to include 1099-Q since he is not the recipient on the the form. Is this correct?

A.  Yes.

Q. For him to file a SEPARATE return, checking the box that he can be claimed as a dependent (not "independently"), he will report 1098-T and his tax questions answers are .....Please advise if these are correct.

--Yes, to someone can claim him. CORRECT

--No, to someone will not claim him. CORRECT, answer no one will claim him in 2021

--he paid for over half of his support, should he answer YES or NO?  Answer No. It does  matter. But you may not be asked that

If he paid for more than half his support (see the work sheet at your other post), then he can file independently (and the answers would be different).  But, more than half his support must still come from earned income (check the wording on the question carefully)  for him to qualify for the refundable portion ($1000) of the AOC*, even as an independent.  Reference: Line 7 instructions for form 8863. https://www.irs.gov/instructions/i8863

[999eezz888]

Thank you for both of your replies. So I went ahead to claim my as dependent but I encounter this (see below) in TT after I reported the 1099-Q, thinking the education expenses will offet the distribution.  

"You can't claim tuition and other fees since your income is too high. Your AGI is exceeds the maximum limit of $180,000, you should continue to enter education expenses to avoid paying tax on your ESA or QTP"

And my tax went up almost $2000, am I being taxed on the earning of 529 on 1099-Q? I thought the 529 earning is tax free as long as it is used to pay for education expenses?

[JillS56]

No, you are not being taxed on the 1099-Q.   The 529 earnings are tax-free as long as the funds are used to pay qualifying educational expenses.  

Since the 1098-T and the 1099-Q are tax forms that do not have to be reported, and you are not eligible for an education credit, I would delete both the 1099-Q and the 1098-T from your return.    I would keep both of these forms with your tax documents.    This way you can be reassured that you are not being taxed on either of these forms.

[Hal_Al]

Q.  I thought the 529 earning is tax free as long as it is used to pay for education expenses?

A.  Yes.  But the TurboTax interview is complicated and doesn't always get it right.  As @JillS56  said, just delete the 1099-Q and 1098-T, they don't affect your tax return.  The 1099-Q and the  1098-T are only an informational documents. The numbers on it are not required to be entered onto your (or your student's) tax return.   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. 

If you feel more comfortable having TT produce the work sheet, there are some things you can try:

Go through the education section again. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it to 0.

Instead, in the education interview, you may reach a screen titled "Choosing a larger education Credit". Verify that TT has entered $10,000 (the amount needed to get the maximum LLC) in the box on that page. In your case, change it to 0.

PLAN C.  On the Student Information Worksheet (abbreviated Student Info Wk on the forms list), go to part VI and change line 17 (“Used for credit”) to 0. Make the change in the first column.  That will automatically change the other columns.

You can't get to the worksheet to directly edit if you are using the online version of TurboTax.  You would need to use the download version to edit on the form.

You can however go to Tools>>Tax Tools>>Delete a form and then delete the student worksheet which would allow you to walk back through the answers making sure you entered everything correctly.

[999eezz888]

Never mind. I found my answer. Thank you.