Yes, room and board (R&B) are qualified expenses for a 529 plan (1099-Q) distribution. If R&B, plus books and computers, for the year, add up to more than $8348, just ignore the 1099-Q. None of the $4345 earnings is taxable (the taxable amount of the distribution is 0).
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
"Her mom claims her as a dependent on her return but does not Qualify for the AOTC, I think because of the 1098-T is showing more in Box 5 than in Box 1.'
Yes, but there is a tax “loophole” available. The student reports all his/her scholarship, up to the amount needed to claim the American opportunity credit, as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.
Using your numbers as an example: Student has $58,493 in box 5 of the 1098-T and $51,955 in box 1. At first glance she has $6538 of taxable income and nobody can claim the American opportunity credit. But if she reports $10,538 as income on her return, the parent can claim $4000 of qualified expenses on their return. If the student's total income is less than $12,400, she will owe no tax. Mom should claim the AOTC. It's more valuable than the tiny amount of tax the student will pay.
If the student does not have enough R&B and other expenses to totally cover the 1099-Q, rather than calculating tax on the 1099-Q, simply increase the amount of taxable scholarship. Example: student's R&B, books and computers add up to $7348. Rather than trying to calculate the amount of tax due on the $1000 unqualified distribution, say it went to $1000 of tuition (rather than that $1000 being paid by scholarship) and increase the taxable scholarship to $11,538. In addition to saving the hassle of entering/calculating the taxable 1099-Q, the scholarship is not considered unearned income. You risk triggering the "kiddie tax" by reporting part of the 1099-Q as income.
Hal
US Army Veteran
