Do I subtract the 529 withdrawal from total education expenses to determine what to enter for the "Amount Used to Calculate Education Deduction/Credit"?

[barbreadsthis]

I'm stuck where Turbotax is asking me to "choose" how much to use to calculate the education deduction/credit. Turbotax already knows that I took a withdrawal from a 529 - does the software take that into account, or do I need to subtract this sum (from total educational expenses) when "choosing" how much to enter in this box?  

I paid $3535 total educational expenses in 2017 - $2677 was from a 529, so I believe I should qualify for a tax credit on the remaining $858. But what do I enter in the Turbotax box? $3535 or $858?

[CarolC · Accepted solution]

Try following these steps to enter your 1099-Q and 1098-T in TurboTax.  You will enter the exact amounts as they appear on your forms.

When entering education expenses enter your 1099-Q first.  Then enter ALL education expenses in the 1098-T section in TurboTax.  This includes tuition, books, room & board, supplies, and fees.  

As long as the education expenses (after grants or scholarships are deducted) are equal to or more than the 1099-Q total distribution, then there will not be a tax implication on your 529 Plan distribution.

[jon857]

The American Opportunity Tax Credit maxes out with $4,000 of expenses. Allocating any more than that results in  "expenses wasted" for this particular credit. 

The Lifetime Learning Credit maxes out with $10,000. 

CLICK HERE for IRS Pub 970 Tax Benefits for Education

Answered by TurboTaxKrisD to this question

[Hal_Al]

It's complicated.

CarolC's instructions are basically correct. But, be aware that TurboTax (TT) will try to maximize the education credit and thereby make some of the 529 plan distribution taxable.  This works out best for most people. 

If you want to change it to the method you describe (use only  $858 for the tuition credit); Go through the education section again. When you get to the screen that says “Here’s your Education Summary”.  Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it. TT would have selected $3535, change it to $858.