Thanks again; one last question is nagging at me and Pub. 970 has some wording that isn't entirely clear on the following:
I understand from our discussion above that if my student receives a scholarship which we elect to include in taxable income - and part of that scholarship was used by the University's Bursar to pay for QEE (tuition & fees), I can claim that amount on my return for AOTC. Now here's the hazy part, in my DS' case, after QEE were all paid up, additional scholarship funds remained, which the Bursar applied to his ROOM charges at school. These additional funds are taxable no matter what - as ROOM is not a QEE. Since his ROOM was paid with these taxable funds, can I remove an equal amount from a 529 tax-free?
I realize there is no "double dipping", but I don't think that is what is occurring here. The part of the scholarship not applied to QEE is always taxable and will be claimed on his return. The school applied these funds to his Dorm Room (depleting the scholarship for the semester). The school has indicated that any remaining funds could go in DS' bank account (and could be used for anything; in the future, this could be his off-campus rent.)
Some of the language of Pub 970 makes me think that the use of the taxable scholarship funds is limited ("If this situation applies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees" ) It would seem to me that once the scholarship is taxable, it could be used for anything - beer, football tickets, car expenses, etc. not necessarily room & board. Since this taxable income (that originated as the scholarship) was used for his Room at college (a 529 eligible expense), it would seem to me that it would justify tax-free withdrawal from a 529 fund in an equal amount. Am I interpreting this correctly?
