IRS Pub 970 is not that difficult to read and shows a lot of examples to make things easier to understand.
It gets complicated because part of the equation is "Well, what do YOU want to do?"
Basically an education can be obtained by the person claiming the student. The credit is based on education expenses including tuition, books and supplies.
The credit is based on these education expenses which were not paid for with a scholarship, distribution, or other financial assistance.
Distributions can be used for the same expenses BUT ALSO for Room and Board. If used for these expenses, the distribution is tax-free.
If any distribution is not used for these expenses, the tax on the distribution is calculated as a ratio of earnings and contributions. Whomever is listed as being issued the 1099-Q is responsible for that distribution.
Now comes the fun part, you can move payments and expenses around at the end of the year.
Unless a scholarship is restricted (approved only for a specific expense, which is uncommon) rather than have a 4,000 scholarship cover tuition, you can have the student claim the 4,000 as income and you take the 4,000 to use for a credit.
If a distribution covered tuition, you can do the same-
"You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit."
Take the expenses for the credit instead of making the distribution tax-free (claiming the exclusion means making it EXCLUDED from tax) because the tax on the earnings of that distribution is usually less that the amount you get from the credit...
BUT NOT ALLWAYS
The Education Section is complicated because it can be adjusted for the situation that particular Taxpayer is in.
IF THE 1099-Q WAS USED TO PAY FOR ROOM AND BOARD AND ONLY ROOM AND BOARD, don't even enter it, there is no tax, room and board is useless for the credit, the 1099-Q is irrelevant.
If you want TurboTax to make the calculation, I suggest you enter the forms on your return.
(but be aware that the choice the program makes MIGHT result in the lowest tax liability for you this year, but MIGHT not be the most advantageous in the long run)
Pub 970
@mweissinger
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
