Does 529 distribution count as parental support in the support test for a dependent?

In order to claim you student has a dependent, you must provide over half of their support. Tuition and fees are included in the cost of support, as well as housing, utilities, meals, etc. Income from scholarships is not included as support. However, as noted in the article below, 

"The IRS has not given guidance on how distributions from Sec. 529 plans affect the support tests. These distributions can be substantial. If the distribution is counted as support provided by the beneficiary (child), it could prevent the child from qualifying as a dependent. Sec. 529 plans allow the owner (usually a parent or grandparent) to change the beneficiary. This provides some support for the argument that Sec. 529 plan distributions should count as support from the account owner and not count as support provided by the child, but tax practitioners are still waiting for a definitive answer from the IRS."

However, as there any distribution exceeding the cost of qualified education expenses is included in the gross income of the student, they are generally seen as contributed by the student for his or her own support. Unfortunately, there is not clear cut answer on this from the IRS to date. You should use discretion on claiming the student as a dependent and consider other cost of living factors, as well. 

Tax Planning for Parents of College Students

Could you clarify if the same argument applies to Coverdell Edu Savings Acct as well. Since IRS has not given definitive statement what is the most common practise, is there any data. I am assuming Coverdell is similar to 529 plans in that they allow changing the beneficiary.

I have similar question but in reverse - I want my child to file as independent as that is more advantageous for him. All of 529 distributions ($40K) went to him or his college directly and were for qualified educational expenses (1099-Q are in his name). His own income from summer internship was sufficient to pay for his rent, food, and personal expenses (approx. $30K). If 529 is counted as parent's contribution than he would not qualify as independent. I see that earlier responses indicate that IRS doesn't have a clear guidance in this case. I paid for his travel and some other expenses but not much, 529 is the one that is the decider in this case. Am I okay then to treat 529 distributions for qualified expenses as not from parent (even though I am the custodian)? Any thing else I need to keep in mind as I go through the support test?

@VictoriaD75 

Thanks

Here are my thoughts for what it’s worth.  Let’s take an example in which my daughter is a sophomore in college in 2020.  She doesn’t work and has very little savings (less than $1k).  Assume we use 529 distributions to pay $40k for 100% of her college (tuition, room and board, books, etc).  The question is whether she is our dependent.  Below are the reasons I believe the answer should be “yes” regardless of whether the distribution is paid to her, directly to the college or me (as the account owner).

1. In a very real sense, she is entirely dependent on me (within the non-tax meaning of the word).  If I don’t provide the funds for her to go to college (either by paying for it myself or directing the 529 admin to make distributions) she would not be able to attend college.  Her “dependency” is not based on whether the distribution is made to her or whether it’s made to me.  In all events, she is dependent on me (again, within the non-tax meaning of that word) to cause the 529 account to make a distribution.
2. The gift tax consequences of a contribution should not be dispositive.  First, I’ve seen nothing to lead me to believe Congress meant to change the income tax consequences of a contribution by treating the contribution as a completed gift for gift tax purposes.  Second, it’s hard to square the idea that the beneficiary of the 529 account is the “income tax owner” of the account at the time of contribution when (A) the income tax consequences of any earnings won’t be known until a payee of a distribution is designated by the account owner and (B) the account owner can change the designated beneficiary at any time (including by naming himself beneficiary) and (C) the account owner can distribute the money to himself at any time.  
3. There are many circumstances in income tax law in which the state law owner of property isn’t the income tax owner of the property because another person bears the economic upside and downside of the property or another person has such control of the property that such person should be treated as the income tax owner even though he/she doesn’t have legal ownership (examples include deep in-the-money options and revocable trusts).  In the case of a 529 account, it seems the account owner has BOTH legal title and control and can capture all of the upside (by naming himself beneficiary or distributing funds to himself). Thus, it doesn’t seem appropriate to look at gift tax consequences for determining income tax consequences (e.g., dependency). 
4. Treas. Reg. section 1.152 likely wasn’t intended to cover the income (or excluded income) from a section 529 account distribution.  Even if this regulation has some bearing on the current dependency issue, however, it would seem the regulation only applies to treat the earnings (1099-Q Box 2) as excluded income (and therefore beneficiary self-support) and the portion of the distribution that is tax basis (1099-Q Box 3) would not seem governed by the regulation because tax basis isn’t excluded from income (because return of tax basis isn't income in the first place).  
5. If I didn’t have a 529 account and I deposited $40k into my daughter’s bank account to pay her college invoices, that would seem to be parent support even though the money arguably becomes her money until she actually pays the invoices.  If I instead direct the 529 account to make a distribution to my daughter and she then pays the invoices, is the substance any different?
6. Assume I paid the $40k invoices out of my own funds and then made a distribution from the 529 account on December 31, should the dependency question really hinge on whether I make the distribution to myself or I make the distribution to my daughter and my daughter then gives the money back to me?
7. Consider the 2020 tax year in which non-dependents might be entitled to a Recovery Rebate Credit (because he/she didn’t get a stimulus check because he/she was a dependent in 2019).  The Recovery Rebate Credit is $1,200 and potentially another $600 (or more) if currently proposed legislation is signed by Trump.  In my example, should my daughter really get the Recovery Rebate Credit?  Although I might the lose the AOTC and the credit for other dependents, this Recovery Rebate Credit is more than the sum of (A) the refundable portion of the AOTC and (B) the non-refundable credit for other dependents.  Since we can't use all of our nonrefundable credits, we would be better off if she wasn’t a dependent (but that seems like the wrong answer).

In conclusion, I'm struggling to think of a single fact set in which a person was treated as the income tax owner of property where someone else (1) had legal ownership of the property; (2) had total control over the property; and (3) could capture all of the economic upside of the property (and suffered the economic downside of the property).  Thus, it makes more sense to me to treat the account owner as providing support to the student regardless of how the cash distributions flow.

What if parent transfers the ownership of  the 529 account to a student/child? In this case student would provide more than half of his support, file as independent, get full standard deduction and AOTC?  There is no credits at all on parents return because income is above $500,000. Student’s w-2 income $5000-6000 a year. If total educational expenses are 20,000, but 529 plan distribution $16,000, can a student use $4000 for refundable part of AOTC???