@Carl - agreed as long as the taxpayer is not eligible for AOTC..... but if they are eligible for AOTC....
The $25K gets applied first, and it can not be applied to room and board. It can only be applied to the 47K of qualified expenses. That leaves $22K left. AGREED (your $47k is the $45k of tuition and $2k of books)
of that $22k that is left it can be used for AOTC and the max is $4,000, leaving $18,000
now we add back in the Room and Board of $15,000, giving us $33,000 of remaining expenses
the 529 distribution was $37,000, meaning $4,000 of Box 1 was unnecessary so that $4k/$37k or 10.8% of Box 2 is taxable earnings.
the "cost" of obtaining the $2500 AOTC credit is that some of the Box 2 earnings are taxable and that is a good trade!
