I used distributions from a 529 to pay for college tuition. My parents own the 529 and I am the beneficiary. They do not claim me as a dependent on their tax return. Can I claim an education tax credit, even though the tuition was covered by the 529?
No, you cannot.
If your tuition is paid by the 529 plan which is already tax-free, you cannot claim an education tax break, unfortunately. There is no double-dip.
Yes, you can.
But double dipping is not allowed. In order for you to use some of the colleges expenses to claim the credit, you (or your parents) may have to declare some of the 529 distribution as taxable.
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you (or your parents) can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship*
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q (on either the student or parent's return, depending on who's name, and SS#, the 1099-Q is in)**
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
Since the credit is usually more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion.
*An alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.
**For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return. The recipient's name & SS# will be on the 1099-Q.