Education

There is a screen in TurboTax that asks how you want to allocate your qualified education expenses between the education credits (e.g., AOTC) and your 529 plan (1099-Q) distribution.  If you use the 529 plan distribution to pay your qualified education expenses, those same expenses cannot be applied to the AOTC.  So, make sure you complete all of the education section questions to find the "allocation" screen for your section 529 plan distribution.

It is usually better from a tax standpoint to allocate your qualified education expenses to the education credits (AOTC ) first, and any remaining amounts to the 529 plan distribution.  But, you don't want to allocate any more than necessary, e.g., $4,000 is the maximum amount of qualified expenses that can be used for the AOTC, but if the amount of your 1098-T expenses after the scholarship is less than $4,000, enter the lesser amount on the allocation screen.

Note also that the 529 plan can be used for expenses not reported on the Form 1098-T and not eligible for the AOTC, including:

• room and board, books, fees, supplies and equipment;
• purchases of computer or peripheral equipment, computer software, or internet access and related service (used primarily by the beneficiary enrolled at school); and,
• payments on qualified student loans. 

So, make sure you have entered all these in TurboTax for the year you received a distribution; there is a 1098-T screen that "opens up" boxes for these if you have a 1099-Q entered.

If your 529 distribution exceeds your qualified expenses, the earnings portion of the distribution will be taxable, and may be subject to an additional 10% penalty.  There are exceptions to the penalty, but those exceptions are limited. But, the scholarship will be taken into account for this, i.e., you won't get a penalty for qualified education expenses that were covered by a scholarship.

Note that the allocation between education credits and 529 plan distributions can also be done in the Forms mode if you are using the Download/CD version. Go to Forms mode and find your "Student Info Wk".  Scroll down to Part VI and find line 17.  If you enter $4,000 on line 17, TurboTax will first use $4,000 of your qualified expenses for the education credits/deductions (e.g., AOTC) and then use any remaining expenses you entered to apply against the 1099-Q distribution.

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