@Hal_Al wrote:Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000 used to claim the AOTC
=$3000 Can be used against the 1099-Q (usually on the student’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
You have $240 of taxable income (600-360)
Another way to look at it:
If the gross distribution (Box 1 of 1099-Q) is $5000 and the Earnings on that amount (Box 2) are $600, then 12% of the distributions from the 529 represent earnings (realized gains) that are taxable unless sheltered by the 529; and 88% of the distributions represent return of principal which is not subject to tax.
In the example, of the $5000 gross distribution (Box 1), $2000 is "Excess Distributions" which are not sheltered by the 529 plan. Therefore, 12% of this amount, or $240, is income subject to tax.
