I understand that F-1 Student cannot be claimed as a dependent by a Resident because F-1 student is an exempt individual, even if he/she meets the substantial presence test.

However, I know that after 5 years, F-1 student will not be exempt anymore (am I right?). So my question is, since I support my nephew (on F-1 Visa, in the U.S. for more than 5 years) and pay his tuition fully, can I claim him as my dependent?

Let's qualify this a bit:

An F-1 student is exempt from the Substantial Presence Test for the first five calendar years they are in the U.S.

So if your nephew arrived in country anytime in 2003 or earlier, his exempt status expired on 31 December 2007. He began accruing days against the Substantial Presence Test and, barring any other obstacles, can file as a resident alien for 2008. If he is a resident alien, then, yes, you CAN claim him as a dependent.

However, he can petition the IRS to STILL be considered as non-resident alien student and still be exempt from the Substantial Presence Test, by showing a "closer connection to his home country" and by documenting that his course of study traditionally takes longer than the normal five years that the IRS allocates for college attendance.

Some doctors (who attend four years of medical school, then complete the five year internship/residency programs) adopt this course of action if they intend to return to their home country after they complete their residency, NINE years after entering the country. They do this to avoid paying Social Security and Medicare taxes on their residency salaries, which can a significant tax from which they will NEVER get any benefit.

So, bottom line, you need your nephew's cooperation in order to claim him as a dependent.