529 withdrawals for adult children in grad school

[kkayne]

I have two adult children both in grad school.  One lives on his own and one still lives at home.  Both are over 24 and neither are dependents.   I withdrew from 529 (to me, the owner, because it was way faster) and then transferred $ to older son so he could pay his tuition bill.  Then I withdrew (to me again) and I paid tuition for younger child.  

Withdrawals match their tuition expenses.  1099Q is in my name (combined total for the 2 kids) and 1098Ts went to them.  So am I correct I claim the tax free withdrawal for qualified expenses on my return, and they claim tuition expenses on their own tax returns? 

[AmyC]

The 529 should not be reported for qualified expenses so it will not go on your return. The kids are filing their own returns and can claim LLC for any expenses not covered. Remember, the 529 can count for room and board, even the one living at home. This frees up more money for the LLC.

IRS Publication 970, Tax Benefits for Education states:

If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions.

[Hal_Al]

Q. So am I correct, I claim the tax free withdrawal for qualified expenses on my return, and they claim tuition expenses on their own tax returns? 

A. No. That would be "double dipping".  You can not both claim the same expenses for a tax break. You can not count their tuition in order that your 529 distribution be totally tax free and them claim the same tuition amount in order to claim the Lifetime Learning Credit (LLC)*. 

But, as others have suggested, room and board (R&B) are qualified expenses for a 529 distribution (but not for the LLC), if the student was half time or more, even if the student lived at home.  For off campus living, the amount of R&B is limited to the lesser of your actual cost or the school's "allowance for cost of attendance".

Books and a computer are also allowable expenses for the 529, but not the LLC. 

*Grad students are not eligible for the American Opportunity credit (AOC), except if they start grad school in the same year they finish their BA/BS.  Usually that's academic, as the 4 time limit for claiming the AOC will prevent them from claiming the AOC. 

The Lifetime Learning Credit (LLC) is a non-refundable credit. That is, it can only be used to reduce an actual tax liability. So, it's unlikely that  full time students will need all their tuition to claim  enough credit to reduce their tax to zero. So, you may be able to split the box 1 (of the 1098-T) tuition amount between you. Example: student has $10,000 in box 1 of the 1098-T, box 5 is blank.  Student had a summer job and has a tax liability of $200. The LLC is 20% of tuition paid. The student only needs to claim $1000 of expenses to wipe out his tax.  The other $9000 can be used by the parent toward the 529 distribution. 

[Hal_Al]

Revised my reply, above, to add this paragraph:

The Lifetime Learning Credit (LLC) is a non-refundable credit. That is, it can only be used to reduce an actual tax liability. So, it's unlikely that  full time students will need all their tuition to claim  enough credit to reduce their tax to zero. So, you may be able to split the box 1 (of the 1098-T) tuition amount between you. Example: student has $10,000 in box 1 of the 1098-T, box 5 is blank.  Student had a summer job and has a tax liability of $200. The LLC is 20% of tuition paid. The student only needs to claim $1000 of expenses to wipe out his tax.  The other $9000 can be used by the parent toward the 529 distribution.