Hello,
Here is my situation: I had a 529 plan with about 20,000 in it, and have two kids (A & B).
Kid A had 15,000 of education expenses which was paid from the 529 plan to make her balance 0 leaving 5,000 in the 529.
Kid B had 20,000 of education expenses which 5,000 was used from the 529 and 15,000 cash to pay their tuition off.
Kid A left home in May, and is going to file single/not claimed as a dependent due to them not being at home + providing 1/2 of their support. Since I paid for kid's A tuition with the 529 there can be no AOTC claimed, but can I take a penalty on $4,000 by saying I am not using that for edu expenses for kid A or instead apply $4,000 of it to kid's B tuition which would free free up $4,000 on kid's A tuition to be used for the AOTC on their tax return.
Thank you
If the 1099-Q came to you, there is no way to know how you spent the money and you can allocate the income as desired. You only need $4,000 of tuition and related expenses to claim the full AOTC. In addition, the 529 money can go towards room and board, even for students living at home. This should free up money for both you and your oldest to claim credit on returns.
Please see my 529 example with IRS information here and another here to maximize refunds.
Curious to know, what if the money was paid directly to the school? I believe the 1099-T said there was nothing paid to them - box 1 was empty even though money was paid
If the 529 was paid directly to the school, then the only money manipulation would be tuition vs room and board. The student would be locked in due to the payment to the school. The 1098-T should show tuition billed regardless of how it was paid in box 1.
Thank you. When you say you can use the 529 on the at home room and board, I read there is a limit based on the index the school provides - is this the student room fee? Thank you for your help
For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). If kid A is the beneficiary of the 529 plan, any money used for kid B's education is a non qualified distribution, unless the beneficiary was officially changed prior to distributing the last $5000.
Be advised that kid A may not be eligible for all the AOTC. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. . Reference: Line 7 instructions for form 8863. https://www.irs.gov/instructions/i8863
@JKCPA said " I read there is a limit based on the index the school provides - is this the student room fee?
Simple answer: Yes, you can use that amount.
Okay so child A is the beneficiary on 1099-Q. Child A left in May, and then made ~ 35,000 for the rest of the year, so as long as the 529 plan showed child B as the beneficiary then all is okay?
Q. So as long as the 529 plan showed child B as the beneficiary then all is okay?
A. Yes. Although it is surprising that the plan didn't issue two separate 1099-Qs, one for $15K with Child A as the beneficiary and one for $5K with child B as the beneficiary.
Thank you Hal_Al. It is my first time dealing with a 1099-Q, so when the parent switches beneficiaries then there will be two lines, correct?
Pretty much there are are is a 20,000 dist. 1099-Q from a 529 plan, and the parent told me that there was 16,000 in education expenses for child A, so I believe she took the remaining $4,000, and paid for child B. There is another 1099-Q with child B on it and it is in state (box 5) checked.
Since child A went on their own, and can take the credit, I am trying to get the credit for her without taking the penalty on the parent's return along with them being in the 35% bracket + ~4-5% in state states, so it would be around 50% tax on 4,000, so 2000 for the benefit of $2,500 on child As return. It would be worth it, but defeat it a lot.
I do really appreciate all your help.
@JKCPA said "There is another 1099-Q with child B on it and it is in state (box 5) checked."
You're OK. That sounds like Child B already had his own plan. That wasn't clear at first.
If the remaining $4000, from child A's plan was not used for Child A's education, including room and board, that part is a non-qualified distribution. Using it for Child B's education does not change that.
20% (4000 / 20,000) of the box 2 amount is taxable (not the full $4000) and subject to the 10% penalty.