If the 529 distribution is made to the student, can this be considered as Student support, so he/she can file her own return and get AOC, as it will be excluded if the parent declares the student as dependent due to income phaseout. Also, when tried in HR Block/Turbo, if we make the student as independent, he becomes eligible for EIC and recovery rebate as well because his income was just around $6K in 2021.
Any thoughts? Has anyone declared 529 Distribution as student support and filed the return for student as independent? I see that there is still not clarity from IRS on who owns the 529 distribution.
Itâs more a matter of who owns the 529 account that the distribution comes from, and not who âownsâ the distribution. You are right that the IRS does not provide absolute clarity on this (and many other 529 things). However, if the distribution is made payable directly to the student (or to the school for the studentâs benefit) from an account not owned by the student, I think it would be very hard to make an argument that this should be considered the student providing his/her own support. The account owner can always choose to make or not make a distribution from the 529, and can always change the beneficiary to someone else.
However, if the distribution to student is in excess of qualified expenses, the student gets taxed (student is on the 1099-Q). So, from a taxation perspective, doesnât it feel like an event for taxable consideration happens at the time of distribution that lies with the student who received it?
If a student beneficiary receives a non-qualified distribution, only the earnings portion of the distribution would be subject to income tax. The U.S. government is not going to let investment earnings on a non-qualified distribution go untaxed. The student doesnât have to bear the burden of receiving the taxable income on a non-qualified distribution. The account owner could very easily take the distribution, pay the tax on the earnings, and then gift the whole amount to the student. The who-pays-the-tax-issue doesnât at all change the logic on whether or not the distribution should be considered the student providing his/her own support, when the funds have come from a 529 account owned by someone else.
Good point, especially when the account owner makes the decision on how/who/when a distribution is made. I totally get it.
What confuses/contradicts is how it is treated as a completed gift at the time of contribution to beneficiary. Here is the link to IRS publication. Look for 529(c)(2)(A).
Another random page I found on this topic from a CPA firm, which claims it belongs to the student!
I donât know which of your childâs educational expenses she is paying herself to qualify for the AOTC or the LLC. You canât claim the expenses you pay with scholarships or 529 funds. Some of the AOTC is not ârefundableâ and with only $6000 in earned income and a $12000 personal exemption, itâs unlikely she will owe any taxes.
For the EIC, sheâd have to show that she maintained more than half the cost of her home for the year. Does she live at school year round?
If you paid more than half the total cost to keep up a home during the tax year you file your taxes, you meet the requirement of paying more than half the cost of keeping up the home.
Costs include:
Rent, mortgage interest, real estate taxes and home insurance
Repairs and utilities
Food eaten in the home
Some costs paid with public assistance
Costs donât include:
Money you got from Temporary Assistance for Needy Families or other public assistance programs
Clothing, education and vacations expenses
Medical treatment, medical insurance payments and prescription drugs
Life insurance
Transportation costs like insurance, lease payments or public transportation
Rental value of a home you own
Value of your services or those of a member of your household
Youâd have to decide if she can claim that she paid more than 50% of those costs for the year. Students usually have to be 24 before they can get EIC but I did read that for 2021 they dropped that to 19.
Yes, gifts to a 529 are considered by the IRS to be completed gifts, but this particular treatment is unique in that the designated beneficiary of a 529 (the gift recipient) can always be changed to a different person (with limitations). In all other cases, a completed gift belongs to the original recipient.
As far as the CPA opinion goes, I personally donât agree with it, and without a citation or any reference we canât know on what this opinion is based (certainly not anything Iâve seen from the IRS).