CHOOSING A LARGER EDUCATION CREDIT OR DEDUCTION

[stho]

We have 2 dependents attending college.  We have distributions from 529 Plan's.  We have already used the American Opportunity Credit for our oldest for 4 years.  Turbo Tax is  saying we may be able to reduce our taxes by treating some of the 529 distribution as taxable.  The maximum amount in our case

= $9,948.  Says we can try different values between $5,833 and $9,948.  Or we can use ZERO.  (Zero treats the entire distribution as nontaxable, to the extent of qualified education expenses.)  Zero gives us the best refund.  My question is why is it zero OR $5,833 - $9,948?  Playing with the numbers if I use $1,000 I get the same result as Zero.  If I use $4,000 I get a better refund.  If I go up to $5,000 it starts going back down again.   Can I use $4,000?

[KrisD15]

That's hard to say without seeing all the numbers, but the American Opportunity Tax Credit (AOTC) maxes out with 4,000 expenses. 

So if you allocate 4,000, you get the full credit. As you increase the amount of expenses to use for the credit, the credit will not increase, it is already maxed, however, some of the distribution may now start being taxed. 

Yes, you can use 4,000 and if you're getting the AOTC it would be silly to allocate any more than that to the credit. 

[stho]

Cannot use the AOTC as we have already used it 4 years.

Trying to understand why Turbo Tax states "we may be able to reduce our taxes by treating some of the 529 distribution as taxable."  Tuition/books paid was $9,948.  529 Distribution was $4,115.  Therefore, balance of tuition paid was $5,833 with cash other than college savings distribution.  Why does it only say to enter amounts between $5,833 and $9,948 OR zero?  If enter zero they will treat the entire distribution as nontaxable (to the extent of qualified education expenses) using only any remaining education expenses as eligible for the credit or deduction.    The remaining education expenses would be $5,833.  IF $4,000  is the max deduction can I just enter $4,000 rather than zero as entering $4,000 gets a better refund. 

[Hal_Al]

Room and board (even if the child lives at home) is a qualifying expense for the 529 plan, freeing up tuition and books to be partially used for the tax credit. For the student who already claimed the AOTC four times, there's the much less generous Lifetime Learning credit (LLC) or Tuition and Fees deduction (TFD)

[stho]

I did not realize you could use room & board even if student lives at home??

[Hal_Al]

Yes, but you can not claim more $ than the school charges  on campus residents.