Q. Can I claim the American Opportunity Credit if my grandparents paid my tuition out of a 529?
A. Yes, maybe (probably).
As others have indicated, "double dipping" is not allowed. That is, you cannot count the same college expenses for the American Opportunity Credit (AOC) that your grandparents claimed for the 529 distribution to be tax free.
But there are some options available. Room and board are also qualified expenses, even if you live at home. Your grandparents may claim the meal plan amount your college charges on campus students. If you actually pay rent, they may claim that amount or the college's room charge, whichever is less. If you live at home, rent free, it's not clear that "room" is allowed.
Another alternative, is for your grandparents to pay some tax on the 529 distribution*, to free up expenses for you to claim the AOC. The family comes out ahead as the AOC is a much bigger tax benefit. The penalty (but not the tax) is waived on the 529 plan distribution under that scenario. This assumes that either you or your parents, if you are their dependent, are eligible for the AOC.
Books and other course materials (including computers) are eligible expenses for either the AOC and/or 529 distribution.
*Example
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount your grandparents can use to claim the earnings exclusion on the 1099-Q.
$7,000 in educational expenses
-$4000 used to claim the American Opportunity credit (by the student or his parents)
=$3000 Can be used against the 1099-Q (on the grandparent's return)
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
60%x600= $360
The grandparent's have $240 of taxable income (600-360).
For 529 plans, there is an “owner” (usually the parent, but apparently the grandparent in this case), and a “beneficiary” (usually the student ). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the 529 plan to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return. The recipient's name & SS# will be on the 1099-Q.
