In order to claim student as a dependent, it is good if 529 distributions are considered parental support.
I think most people assume this.
But there are other cases where student makes some money, and therefore wants to file an independent tax return without anybody else claiming him as a dependent. In this case it is better that the 529 distributions are considered student self-support so he can say he provides more than 50% of his support.
The IRS has not come down definitively on this. So as a taxpayer, do you think I could assume either case can be true?
I read that article a few years ago, and it made my head hurt. I don’t know if the IRS has made a determination on this, but to me common sense says that if the student owns the 529 account, money from the account counts as the student providing his own support. If the 529 account is owned by someone else, money from the account is not the student providing his own support.
I want the opposite to be true, so please indulge me.
assume non-custodial parent owned, student beneficiary.
This site seems to be agreeing with student support: https://dsjcpa.com/student-dependent-support-issues/
Section 529 Distributions (QTP Plans)
In general, any distribution is includible in the gross income of the student unless it is used for qualified education expenses (tuition, fees, books, supplies, and equipment required for enrollment, plus the cost of room and board). If the distribution exceeds qualified education expenses, a portion is taxed to the student and will usually be subject to a 10% penalty tax.
Since the student is taxed on the QTP distributions (or excluded from the student’s gross income), they are generally considered as contributed by the student for his or her support.
Another argument I think in my favor that that 529 distributions from non-custodial parent are considered student unearned income on the tax return and student untaxed income on the fafsa EFC calculations.
To me, the key factor is who has control of the money, and can decide how, when, and for whom it is spent. If the student can’t make those decisions, and if the money could legally be spent on someone else’s benefit, I have a hard time seeing how it can be said that it’s the student providing his own support.
We are possibly going to have that issue in the future with student loans for grad school, which will be student provided support.
So far we have still provided more of the support than my D. She took out a partial subsidized loan this year, but we paid for food, part of housing, health insurance, fees, etc.
@rgosula, why do you want the student to no longer be a tax dependent? The new tax law for 2018 does away with personal exemptions and gives a single person a maximum $12,000 standard deduction.
Parent would miss out on education credit and a $500 dependent credit if student can’t be claimed as a dependent.
it is not exactly like this. But lets say 1/3 support comes from custodial parent, 1/3 comes from non-custodial parent through 529 plan, 1/3 comes from student part time job. Nobody actually supports 50%. so nobody can take the exemption. if the 1/3 from non custodial parent 529 plan can be considered student support, then at least the student can. Also I am dealing with 2017.
Divorce changes the child dependency requirements. A custodial parent doesn’t have to provide half the support but still gets the deduction. And can give that deduction away to the non-custodial parent even if the NCP doesn’t provide more than half the support. Gotta love the IRS. My brother and ex wife each take one kid even though they are twins and spend exactly the same amount of time with each parent, and my brother probably provides a little more in $$.
I don’t know the answer to the original question, but I’m running it both ways for my daughter this year as she did provide very close to half (or more) of her own support. I’m sure we can justify it either way (that I provided half+ or that she is self supporting) to the IRS if needed. I’ve never heard of the IRS disputing that a full time college student isn’t a dependent.
If you are the parent who is considered to be the custodial parent, then I think it only matters what you and your son contributed to his support. Third party support is not counted in your or his support.
At least that’s how I interpret the “worksheet in determining support” in the above link.