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?"
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:
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.
@Hal_Al can you assist here?
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.
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.
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)?
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.
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.
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.
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.
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.
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.
@bill_321 wrote:
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.
Publication 970 says "This exception only applies to the extent the distribution isn't more than the scholarship..." If you withdrew $10,000 against $zero of allowable expenses, because there was a $10,000 scholarship, the $10,000 would not be subject to the penalty. But you are discussing withdrawing $25,000 against $15,000 of expenses. The whole distribution is more than the amount of the scholarship. There is nothing in the publication that suggests you can treat the withdrawal as two separate withdrawals of $10,000 (taxable but exempt from the 10% penalty) and $15,000 (allowable).
Pending correction by an expert, I think the excess withdrawal is still subject to the penalty.
$10k for tuition withdrawn. Tuition grant was $10k. This is exempt from penalty, but not tax. Doesn't exceed grant.
$15k for R&B withdrawn. This is exempt from tax and penalty as an allowed expense.
Total expenses $25k. Total withdrawn $25k.
But, that's why I think the 1099-Q should provide more detail. Upon withdrawal at 529 site, there is no way to specify that the withdrawal is "penalty exempted". Just allowable or non-allowable. The detail on the 1099-Q doesn't match the detail needed to file if one has more than one category of a) allowed ... in which case you don't need to use the 1099-Q at all....b) non-allowed, subject to tax and penalty and c) non-allowed, but exempted from penalty. And, one can definitely have withdrawals from more than one of those categories.
@bill_321 wrote:
$10k for tuition withdrawn. Tuition grant was $10k. This is exempt from penalty, but not tax. Doesn't exceed grant.
$15k for R&B withdrawn. This is exempt from tax and penalty as an allowed expense.
Total expenses $25k. Total withdrawn $25k.
But, that's why I think the 1099-Q should provide more detail. Upon withdrawal at 529 site, there is no way to specify that the withdrawal is "penalty exempted". Just allowable or non-allowable. The detail on the 1099-Q doesn't match the detail needed to file if one has more than one category of a) allowed ... in which case you don't need to use the 1099-Q at all....b) non-allowed, subject to tax and penalty and c) non-allowed, but exempted from penalty. And, one can definitely have withdrawals from more than one of those categories.
But it's all treated as one withdrawal, you get 1 1099-Q listing everything.
Or from a more deterministic point of view, once you got the $10,000 tuition refund, you should have only withdrawn an additional $5000 for room and board.
I don't see any support for the idea that you can calculate the penalty or exemption in the way you want to. But again, I am willing to be corrected by a smarter expert.
@bill_321 said "that's why I think the 1099-Q should provide more detail."
That's not reasonable. The 529 Plan administrator has no way of knowing what you or your student did with the money or whether or not the student had a scholarship or is claiming a tuition credit.
It is reasonable to expect TurboTax (TT) to recognize the various scenarios and report the distribution correctly, on the tax forms. TT can do this, but it helps for you to have some idea of the outcome. As @Opus 17 explained, in your scenario 40% of the earnings are taxable (as you indicated, reported on Schedule 1). In addition, TT should claim the scholarship penalty exception by completing form 5329. With your "solution" to send part of the distribution to the student-beneficiary, this happens on his return, instead of yours. And yes, he can do that. It does not matter whether he is is your dependent or not.
Q. How do I enter this scenario, in TT?
Tuition $10,000 paid by scholarship
Room & Board $15,000
$25,000 529 withdrawal, by parent-owner (Earnings portion $10,000)
Neither student or parent will claim a tuition credit
A. First enter the 1099-Q. Later, in the educational expenses section, enter the 1098-T. Answer yes when asked if you have any book expenses (that gets you the screen to enter room & board). The 1098-T should have $10,000 in box 1 and $10,000 in box 5. That tells TT that the tuition was covered by scholarship and the $10,000 non qualified portion of the distribution qualifies for the penalty exception.
Be on the look out for a screen titled “Amount Used to Calculate Education Credit”.
TT does not "sense" that you do not qualify for a tuition credit so it frequently allocates expenses to the credit (sometimes $4000 but usually $10,000). Change the prepopulated amount to $0.
Here's a quicker workaround (or if you run into a snag above). Rather than entering the 1098-T later: at the 1099-Q interview, when asked who the beneficiary is, answer someone not listed here. Then enter your son's name at the next screen. That will get a you a simpler screen to enter expenses, in the 1099-Q interview. There are several screens before you get there, including one asking for the level of school the student attended. After entering the expenses, be sure to enter the offsetting amount at "Adjustments: Tax-free assistance" (scholarships).
Thank you very much for the detailed response and the how to aspect of it..
The reason I think the 529s could do it is because when I make a withdrawal they asked me to specify what sort of withdrawal it is and have around eight choices. They could have a choice that addresses the type of withdrawal were discussing.
Of course that's only useful if the IRS made changes to the format of the 1099-Q.
So they do know, in the sense that they asked me. For example they do ask the qualified withdrawal, a non-qualified withdrawal etc. but that info doesn't show up on the 1099 q.
Regardless, I really appreciate the detail.