Discussion:529 Plan in dependent's name - still a dependent?

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Discussion Forum Index --> Basic Tax Questions --> 529 Plan in dependent's name - still a dependent?

Discussion Forum Index --> Tax Questions --> 529 Plan in dependent's name - still a dependent?

CMccullough (talk|edits) said:

2 May 2008

This seems like it should be a very simple question to answer however, I can't find any mention of it in my tax law volumes or the IRS code. The question is this..

I've got a child with a 529 account in his name. I need to know if the distributions made from his 529 for qualifying education expenses count as his support of himself.

Can anyone help me?

TREEDCO (talk|edits) said:

22 February 2009
Did you ever get an answer to this question? I'm dealing with a taxpayer who has a dependent who received money from his 529. The student is the beneficiary and the taxpayer is the owner. To whom does the money count as support from, the benficiary or the owner?

Riley2 (talk|edits) said:

22 February 2009
I don't see too many students who fund their own 529 plans -- even though this is perfectly legal.

Smokeytax (talk|edits) said:

13 February 2010
Can we revisit this?

I'm thinking that withdrawals from 529 plans are counted as support provided by the owner of the plan, not by the beneficiary, in spite of the gift tax rules that the transfers into the account were a completed gift to the beneficiary.

Otherwise, there could be a lot of unintended consequences, over and above the the parents not being able to claim the child as their dependent.

The parent would have to inform his employer that the child's portion of employer paid health insurance needs to be included in the parent's wages.

Does this make sense?

Taxalmancer (talk|edits) said:

February 23, 2011

The August edition of The Tax Adviser has an excellent article about this very issue. You should read it if you have access to it. The authors present an argument for, and against, treating the distributions from a 529 plan as support deemed paid by the child. In the end, they conclude that Treasury or Congress needs to address this issue and provide guidance.

The argument for treating it as support paid by the child is Reg. 1.152-1(a)(2)(ii) because, when a distribution is made from the 529 plan to pay for education expenses it is the student who is taxed, or not taxed, on those distributions. The argument against treating it as support paid by the child is Prop. Reg. 1.529-1(c) and Reg. 20-2042-1(c)(2). The argument here is that the account holder can change beneficiaries and thus provides an incident of ownership.

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