Graduate Student & 529 Disbursements Planning

Question

My son started graduate school full time in Sep 2019. It is an 18 month program. He will graduate in Dec 2020.

He will turn 24 in Feb 2020.

Due to undergraduate sports scholarships, he has enough funds remaining in his 529 Account to cover his graduate program, i.e. tuition, books, and room & board estimates.

I am paying the bills for these education expenses and then reimbursing from his 529 account, as I have done throughout his undergraduate program. The 1099-Q has: Distribution Code “1” listed; "Recipient is not the designated beneficiary" box is checked; and, my SSN is listed under the Recipients TIN.

I presume I cannot declare him as a dependent for 2020 since he will be 24? If so, must I have the 529 distributions sent directly to my son instead of me? Then, my son reimburses me?

I am concerned that continuing to have the 529 distributions sent to me, and I cannot claim him as a dependent in 2020, I will be taxed on the entire amount of the 529 distributions, even though I am paying all the education related expenses (with reimbursement from the 529, accordingly).

Hal_Al · Answer

Q. Must I have the 529 distributions sent directly to my son instead of me?

A. No. The fact that he is the beneficiary of the plan (and you are the owner) means it's optional where you have the distribution sent; to you, to him, or directly to the school*. Paying the beneficiary's educational expenses makes the distribution qualified, whether he is your dependent or not.

Q. I presume I cannot declare him as a dependent for 2020 since he will be 24?

A. Turning 24, means he no longer qualifies as a Qualifying Child dependent. He can still be a standard dependent. This means there is now a $4200 income test. The support test technically changes too. **

*For 529 plans, there is an “owner” (usually the parent), and a “beneficiary”. The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.

The 1099-Q gets reported on the recipient's return. The recipient's name & SS# will be on the 1099-Q.

Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip! When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

**There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, a relationship test and a residence test. Only a QC qualifies a taxpayer for the Earned Income Credit and the Child Tax Credit. The Other dependent (qualifying relative) credit is worth (up to) $500 per dependent and is non-refundable.

A person can still be a Qualifying relative dependent, if not a Qualifying Child, if he meets the 6 tests for claiming a dependent:

Closely Related OR live with the taxpayer ALL year (not even one night at the non-custodial parent’s home).
His/her gross taxable income for the year must be less than $4200 ($4150 in 2018)
The taxpayer must have provided more than 1/2 his support (the QC support test was that he did not provide more than half his own support).

In either case:

He must be a US citizen or resident of the US, Canada or Mexico
He must not file a joint return with his spouse or be claiming a dependent of his own
He must not be the qualifying child of another taxpayer