I have a 529 plan which paid all the tuition expenses for my kids, but TT looks at the distribution as taxable and also applies the AOTC. Is there a workaround?

[tbayuk]

How can I get TT to process this situation correctly?  Do I need to delete the 1099Q's completely, but won't that raise a red flag with the IRS.

[Hal_Al · Accepted solution]

Yes, you can delete the 1099-Q. It will not raise a red flag at the IRS. In fact, when the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

I assume your income is too high to claim the AOTC. So, yes you do have to use a work around if you do want to enter the 1099-Q. 

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 (to zero, in your case).

[tbayuk]

Thanks.  My income isn't too high, but my understanding is that you can't claim tuition expenses with the AOTC if you paid for them with 529 funds.  "No Double Dipping".

[Hal_Al]

Yes, no double dipping. BUT
Since the credit is more generous than the 529 earnings exclusion; use as much of the tuition as is needed for the credit and the rest for the interest exclusion, even if you have to pay some tax.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you 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

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)