Q. With these numbers, it makes more sense to claim AOTC, right?
A. Good question. Maybe not. It depends on the 529 plan earnings.
Using an example, let's say $30,000 of that $45,000 distribution was earnings. 12.56% x $30,000 = $3768 taxable income. Not using the AOTC results in about $1100 taxable income ($4000 more QEE allocates to the distribution). You're only saving about $100, in tax, by using the AOTC. You only get to use the AOTC 4 times in the student's undergrad years. If this situation continues for 3 more years, you may not see much benefit from the AOTC. But, if that's all you can get, there's no need to save the AOTC for later. It's better if the parents can use it.
What if you use the Lifetime Learning Credit (LLC) instead. $6000 more will be allocated to the tuition credit, meaning $6000 less goes to the 529 distribution. $39,350 -6000 = 33,350. 33,350 / 45,000 = 74.1% . 25.9% of the 529 earnings portion is taxable. 25.9% x $30,000 = $7767 taxable income. Even if taxed at 22%, the tax should be wiped put by the LLC (maximum $2000).
You want to consider using the download version of TurboTax, rather than the online versions. You can do multiple trial returns to see which gives you the best result.
