Can you help me with the following question? Let's use another example of Sara (a senior in college), but assume Sara spends the entire year away from home in another state at college and she contributes more than 50% to her total support (and her parents cannot and do not claim her as a dependent on their taxes). In previous college years, Sara's expenses were as follows:
$50,000 = Tuition (including room and board)
$30,000 = Merit-Based Scholarship
$20,000 = Remaining Qualified higher education expenses (QHEE)
$10,000 = Sara's income working at college, including during summer away from parent's home.
$2,500 = Sara's contribution to her remaining tuition (QHEE), leaving $7,500 to be paid.
$7,500 = Contribution from Coverdell ESA (and/or 529) which her parent (me) funded
$1,000 = Sara's tax refund (40% of $2500) since Sara owed no taxes & received American opportunity tax credit (AOTC)
$20,000 = Amount remaining in "Sara's" (my) Coverdell ESA (and/or 529) which I want to remove from the plan and put in the bank, given it's no longer needed for college. This is the same amount as the scholarship she received in her senior year, and I am allowed to remove $20,000 without the 10% penalty. I will pay income tax on the earnings. For sake of argument let's assume no earnings, since not key to my question.
My question is as following:
How do I remove the $20,000 this year without negating the ability for Sara to receive the AOTC (i.e. $1000 tax credit refund on her 2020 taxes based on 25% of $2,500)? Note that it is necessary to have $2,500 (as above) not paid by QTPs (ESA or 529) to get AOTC. How can we maintain the $2500 not paid by QTP so Sara gets tax credit ($1000 refund) and get the remaining $20,000 out of ESA?
Thanks!
