dependancy and 529 distribution (not student)

[nwtaxlady]

Client has always claimed daughter as a qualifying child, Now for 2021 daughter is 19 and is NOT a student and has W-2 wages of $3440.
Daughter has a large amount of money in a 529 plan and does not plan to go to school.

Client wants to know if daughter can take out some money out of the 529 plan (before end of year) to take advantage of a lower tax bracket now and say if she took out $5,000 or $6,000 then could the daughter claim herself and get the $1400 EIP and also the EITC on the W-2 wages of $3440?

Since the 529 distribution is not used on education, then is it just the earnings that are taxable and subject to 10% penalty?

Thanks!

[TaxGuyBill]

Now for 2021 daughter is 19 and is NOT a student and has W-2 wages of $3440.

Since the 529 distribution is not used on education, then is it just the earnings that are taxable and subject to 10% penalty?

Does the daughter qualify as a dependent? At first glance, it seems likely the daughter would qualify as a Qualifying Relative.

Yes, just the earnings are taxable and subject to a penalty. However, be aware that if there was a state-credit allowed when the contribution was made, there MIGHT be state repercussions for not using it for qualified expenses.

To combine those two thoughts, how much are the earnings from the 529 plan? If enough earnings are withdrawn, that could increase her income over $4300 to disqualify her from being a Qualifying Relative.


*IF* she does qualify as a dependent (Qualifying Relative), no $1400 Recovery Rebate Credit, no EIC and the Standard Deduction changes to the dependent-version of the Standard Deduction.

*IF* she does NOT qualify as a dependent, yes, the $1400 Recovery Rebate Credit applies, EIC would seem to apply (but be aware that the increased AGI from the 529 could affect it). But that applies regardless of any 529 plan.

[spanel]

I would not go for the $1400 RRC. Most likely Client has already received this in her behalf.
Also, Are you sure she would qualify for EIC? Over half cost of keeping up a home?

Chris

[nwtaxlady]

I would not go for the $1400 RRC. Most likely Client has already received this in her behalf.
Also, Are you sure she would qualify for EIC? Over half cost of keeping up a home?

Chris

Chris, About the EITC, I don't see where over half of cost of keeping up a home is required. I might be missing something here. But this is a 19 yr old and no kids and new rules for EITC brought down the age to 19 if not a student. I read that they must have a home in the US for more than half the year.

[spanel]

I think thats for claiming a child, not on self only EIC.

Chris

[New York Enrolled Agent]

I think thats for claiming a child, not on self only EIC.

Chris

Chris - take a look at IRC 32(c). Taxlady - you are right about new rules for EIC but the old rule already included the residency



(1) Eligible individual

(A) In general. The term "eligible individual" means -

(i) any individual who has a qualifying child for the taxable year, or

(ii) any other individual who does not have a qualifying child for the taxable year, if -

(I) such individual's principal place of abode is in the United States for more than one-half of such taxable year,
....