Hello,
I have searched these forums and the internet for several hours and cannot find an answer to this question.
Here is my situation:
Distributions from 529 were paid to me (account owner) and used to pay my daughters (beneficiary) college expenses. So as in prior years, 1099Q will be issued to me (under my SS#) and a 1098T will be issued to my daughter (under her SS#). This has not presented any issues to me in the past as I claimed my daughter as a dependent on my tax return.
What is new this year is that my daughter graduated from college and (yay) has a full time job. So now I'm helping her with her taxes and would like for her to take her personal exemption on her return (personal exemption deduction is worth nothing to me as my income is above cutoff for full phase-out).
In allowing her to take the personal exemption, she would not be considered a dependent on my tax return (no issue to me for the reason mentioned). As a result, I am now worried that I won't have a person to associate the educational expenses with, therefore, opening myself up to the risk the IRS will look to assess tax and penalties on me for having taken distributions and not appearing (on my tax forms) to have incurred qualified expenses at least equal in amount to the amount those distributions.
One solution is for me to continue to claim my daughter as a dependent (an argument can be made either way on who provides more than 1/2 her support), but in doing so she will lose the value of her personal exemption. I'd rather not do that since I don't get an offsetting benefit when taking that exemption on my return. So I'm puzzled.
Does anyone here have an perspective or advice to share here - anyone deal with this before? I cannot be the only one who finds oneself in this position.
While I know had the distributions been paid to my daughter, this would be a moot point (and I know Joe recommends that - my bad for doing it the other way around). Unfortunately, that is not the position I find myself in now
Any advice would be greatly appreciated.
Thanks,
Mike