@ccchlfields You didn't ask about claiming a Tuition credit. If your daughter has at least $6966 (4000 + 2966) of room and board and/or ther qualifying expenses*, you can claim the American Opportunity Credit (AOC), without making any of the 529 plan distribution taxable. $4000 is the maximim amout of expenses needed to claim the maximum AOC ($2500 credit). This assumes you are otherwise qualified (income under $180,000 married).
Even without additional expenses, you can still claim the AOC, by making some of the 529 plan taxable**. You will come out ahead using this technique.
*Room and board are not qualifying expenses for the AOC. But using the 529 plan to cover R&B frees up tuition to be claimed for the AOC.
**
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000 used to claim the American Opportunity credit
=$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
She has $240 of taxable income (600-360)
