Does my son need to file a return?

[lrporternc]

My son is 19 years old and a full-time college student.  He had no earned income during 2020 since the pandemic curtailed part-time work opportunities.  He did have distributions from his 529 Plan (529 of Alaska) paid directly to his university for tuition, fees, etc (totaling about $11k).  His university has generated a 1098.  He also had a few stock transactions in Robinhood.  He filed a return in 2019 since he worked part-time that year.  Does he have to file a return for 2020?

[DJS]

First, the 529 disbursements are not taxable income. 529 withdrawals are tax-free to the extent your child (or other account beneficiary) incurs qualified education expenses (QHEE) during the year. If you withdraw more than the QHEE, the excess is a non-qualified distribution.

In general:

 All dependent children who earn more than $12,400 of income in 2020 must file a personal income tax return and might owe tax to the IRS. Earned income only applies to wages and salaries your child receives as a result of providing services to an employer, even if only through a part-time job. 

The rules change when your child receives income from sources other than employment, such as interest and dividend payments. When the 2020 total of this type of income exceeds $1,100, then a return must be filed for your child.

If your child’s unearned income only consists of interest and dividends, then you can elect to include it on your own return and combine it with your income. Do this by completing IRS Form 8814 and attaching it to your personal tax return (TurboTax will do this for you).

See additional information here: https://www.irs.gov/taxtopics/tc553 

[lrporternc]

Thanks.  That confirms what I thought.  We haven't gotten his 1099 from Robinhood yet but I suspect his total earnings there will be considerably under $600.

[LinaJ2020]

Dependents who have unearned income, such as interest, dividends or capital gains, will generally have to file their own tax return if that income is more than $1,100 for 2020.

For more information, click here: Unearned income

@lrporternc

[sgt-loudmouth]

What if there were excess distributions from the 529 plan?

My son has $750 in earned income and $200 in excess 529 distributions.  That total is below the $1100 threshold.

I went through the IRS do-i-have-to-file wizard.  The answer appears to turn around my response to, "Are you liable for an additional tax on a qualified plan, including an Individual Retirement Arrangement (IRA), or other tax-favored account, in 2020?"

If I answer yes, it says he has to file.  If I answer no, it says he needn't.

• The 529 plan is a tax-favored account. I think.
• The details on the wizard refer to publications with titles about IRA and about "Health Savings Accounts and Other Tax-Favored Health Plans". (I added the underline.)

529 plans are neither IRA nor Health Plans, so I conclude that the mere fact he has a small excess distribution from the 529 plan does not require filing a tax return.

Does that sound right to you?  Does $200 of excess 529 distribution (with $49 of the distribution attributable to *income*) compel filing a return?

[AmyC]

The 529 is a tax favored account. Your son should be able to file for free at FreeFile delivered by Intuit TurboTax. If he should choose not to file, chances are the IRS won't care because there is not a big tax liability involved.

I am also going to recommend you look at another of my answers for help. with claiming expenses. Maybe he does not need to file.

@sgt-loudmouth