Must I claim my child as a dependent?

[bill_321]

Most of the info online is about requirements TO claim a dependent.  My question is whether I have to claim my child as a dependent, and if I don't whether they can claim as independent and answer "no" to the question "can anyone else claim you as dependent?"

[xmasbaby0]

You are not required to claim your child as a dependent---but the rule for your child is that if he CAN be claimed as someone else's dependent, he must say on his own tax return that someone else can claim him.   He does not have a choice--even if you think it is to his advantage.

For your dependent:

https://ttlc.intuit.com/community/dependents/help/when-do-i-have-to-answer-yes-to-being-claimed-as-a...

[Opus 17]

There are two questions on the child's tax return: "Can you be claimed as a dependent?"  and "Will the person who could claim you, actually claim you this year?"

If the child can be claimed as a dependent but answers No, that could be considered tax fraud.  If the child answers "yes, I can be claimed as a dependent" but "no, the person who could claim me won't claim me", that will affect their eligibility for the AOTC and Lifetime Learning credit, and can–in some cases–allow the child to claim a credit where the parent is prevented by income.

However, even if the child answers "no, I can't be claimed as a dependent", the kiddie tax will apply unless the child provides more than half their own support, or their parents are deceased.  The kid tax is calculated on a slightly different set of rules. 

[Opus 17]

@Hal_Al can you assist here?

@bill_321 

I believe there is a way around this although I am not an expert.   Suppose your child's "qualified educational expenses" are $10,000 for tuition and $5000 for room and board and other allowances.  And suppose the child has a $10,000 scholarship from school.  What you can do is treat the $10,000 as paying for half the tuition plus the room and board, leaving $5000 of tuition uncovered.  You then withdraw $5000 from the 529 plan and it is tax-free because it is treated as paying for tuition.

But @Hal_Al will be able to advise you further.  

[rjs]

Whether Opus 17's idea works depends on the terms of the scholarship or grant. You said "he received a grant covering tuition." If the grant requires that it be used for tuition, you do not have the option to say that you are using part of it for room and board.

[bill_321]

Thanks.

[bill_321]

Thanks.

[bill_321]

Appreciate it.

[Opus 17]

What am I missing?  Room and board are considered qualified expenses for a 529 plan.  See publication 970.

https://www.irs.gov/forms-pubs/about-publication-970

Why would any distribution be taxable to the parent or the child, as long as the distribution is not more than their qualified expenses (after adjusting for the tax-free scholarship)?

[bill_321]

I agree.  The issue is that the form provided by the 529 plan (about which TT asks) only includes total distributions and the earnings/contribution break-down.  There's no further break-down for what I'll call "non-allowable, but not penalized, withdrawals".  

So, for example, if tuition is 10k and R&B is 15k and earnings is 40%, and the grant covers full tuition, if I withdraw $25k, the form will show 

$25k withdrawal

10k earnings

15k contributions

It does not show $4k anywhere (the earnings part of the $$ associated with the grant) to be taxed.  I recall doing a test-run in TT last year (before having done the grant withdrawals) and TT penalized the full earnings.  I got the impression that I would have to enter it manually (on schedule 1?) and TT advised against that.  However, going through the Q&A route to filling out the return didn't have a spot to specify what part is taxable.

It would be convenient if the 529 form had (with above example numbers)

 - Allowable no penalty, no tax, earnings and contribution ($6k and $9k)...i.e. R&B

 - Not allowable, penalty and tax, earnings and contribution (none)

 - Exempted from penalty, but not tax, earnings and contribution ($4k and $6k)....i.e. tuition/grant

And, having software accept those numbers directly.

[Opus 17]

@bill_321 

Did you delete part of your previous questions or comments?  Unless I am getting mixed up with other questions, I think you gave some details that are now missing.  That's very confusing to me (unless I really am mixed up with a different question). 

In any event, from what you just said,

Tuition $10,000

Room & Board $15,000

529 withdrawal $25,000

The withdrawal exceeds the adjusted qualified educational expenses and will be taxable.  I did not understand that you wanted to withdraw excess funds.

You don't get to allocate the earnings to different expenses, it's all proportional.  If the $25,000 withdrawal includes $10,000 of earnings; and if only 60% of the withdrawal is used for adjusted qualified educational expenses ($15,000÷$25,000) then 60% of the earnings are tax-free and 40% of the earnings are taxable.  That's $4000 of taxable income.  

If the $4000 to be taxes is not being calculated correctly in Turbotax, it may be that you have entered some other part of the expense and income equation incorrectly, or that Turbotax has an error of some kind (it might not be picking up the scholarship correctly, for example).  Since the program is not finished for this year, I would plan to revisit this in January.  You might want to purchase Turbotax to install on your own computer from a CD or download, since the desktop version allows direct inspection of the forms and worksheets and makes troubleshooting easier.  

[bill_321]

My "solution" to help with documentation and book-keeping was to send all allowable (no tax, no penalty) to me and the $$ related to the grant to my child.  That way, we will each get a 1099-Q, and combined will show all four numbers.  But, of course, the part on my child's is now their income.....hence the original question.

[rjs]

THE OP DELETED MOST OF THE ORIGINAL QUESTION AFTER REPLIES WERE POSTED.

The original question was much longer and included a lot of details about education expenses.

The answer to the greatly simplified question as it stands now is that "can" means exactly what it says. If you or anyone else can claim your son as a dependent, he must answer Yes to the question "can anyone else claim you as dependent?" It doesn't matter whether anyone actually does claim him. You are not required to claim him as a dependent if you don't want to, but he still has to answer Yes that someone else can claim him.

[bill_321]

Yes, I agree.  It's just that the 1099-Q doesn't break it down to that detail (only shows 25k withdrawal, 10k earnings, and 15k contributions).  TT asks for numbers in those boxes.  There was no place (at least when I did my "test run" last March) to specify if some component wasn't subject to penalty.

So, the tuition part is "excess", but not subject to penalty (b/c of the grant/scholarship exemption).

Thanks for your help.  Will revisit in the spring.

[bill_321]

Yes, the detail surrounding 529 withdrawals was just for background as to why I was asking the "can" versus "will" wording and my child filing as independent.  The detail wasn't necessary for that.

Sorry for any confusion.