Susan is the 21-year-old daughter of Al and Janice. Her sources of funds for support include distributions from a Sec 529 plan funded by her parents (Al & Janice), a part-time job and student loans.

Generally, a child is a qualifying child of a taxpayer if the child satisfies each of three tests: a residency test, a relationship test, and an age test (Code Sec. 152(c)).  However, a self-supporting child (one that provides over one half of his or her own support) is not a qualifying child of another taxpayer (Code Sec. 152(c)(1)(D)).

In determining whether Susan is self-supporting, in addition to the usual accounting of support, a major question is whether the Sec 529 plan counts as support provided by Susan or her parents. Contributions to Sec 529 plans are completed gifts (Sec. 529(c)(2)) and any non-qualified distributions from the 529 plan would be taxable to Susan, supporting the premise the distributions from the Sec 529 plan are support Susan provided. The argument could also be made that because the account owner controls whether a distribution is made and the amount of the distribution and can even withdraw funds for him- or herself, the distribution from a QTP should be considered provided by the account owner for purposes of the support test.  The IRS has provided no guidance on this issue.

At stake here, in addition to Susan’s dependency, is who gets the education credits. If Susan were self-supporting, then she would get the education credits on her return. This would be desirable where her parents’ income phases out the credit, and especially in the case of the American Opportunity Credit, where a portion may be refundable.