Grandma opened 529 plan for grandchild as did Mom. The 1099-Q is in the name of the child. $17,000 was utilized in 2010. Does this create a problem for the Mom to claim the child as a dependent? I raise the question is this money being supplied by the child or the grandmother and mother?
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Seems to me there are two issues:
1) Do the 529 distributions get attributed to grandma or student
2) Will the parents be able to claim the student as a dependent
The first question is a major hurdle. The IRS position is that the education costs are attributed to the student. They base their position on Regs. 1.152-1(a)(2)(ii) and 20.2042-1(c)(2).
Taxpayers and parents have maintained that the account owner (grandma) retains control over the funds and thus under Reg 1.529-1(c) the account owner (grandma) is attributed with the support.
There is no clear guidance so you choose which position you take.
If grandma is attributed with the payments from the 529 plan then she has provided support in the amount of $17,000. The student/child has provided no support.
Wouldn't the parents then be able to claim the child/student as a dependent because the parents would pass the support test for a QC? -
Yes parents get the exemption
I agree, if grandma provided the support the parent gets the exemption.
It sounds like you have done your homework here and it is a gray area as to who is providing the funds for school. I guess we will side with grandma.Comment
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There is an excellent article about this very issue in the August edition of The Tax Adviser. In the article, they implore Congress or the Treasury to provide clarity and guidance about this issue.Comment
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Do you have a citation as to where the IRS applied the latter?Originally posted by ttbtaxes View Post
The first regulation refers to the example of Social Security benefits, making the point that although not included in gross income, such benefits, if used for support, count as funds provided by the recipient. This relates to the 529 only because those distributions are (typically) excluded from gross income, but doesn't address the question of who is the real owner (which is unambiguous for Social Security but ambiguous for 529).
But the second regulation would seem to argue against it being the student. It says that the proceeds of a life insurance policy are included in the decedent's estate, even if the estate isn't the beneficiary, if the decedent had, as of the date of death, the "incidents of ownership," which include, among other things, the right to change the beneficiary. Since the owner of a 529 (e.g. the parent or grandparent) has the right to change the beneficiary at any time, this would argue that it belongs to the owner and not the beneficiary.
So I don't understand why the IRS would say that provision implies that it's support provided by the student.Comment
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