Based on those numbers, a small amount of the distribution is taxable. A larger amount is taxable, if you claim the tuition credit.
Example 1:
$16,146 in educational expenses
- $0 paid by tax free scholarship
- 0 used to claim the American Opportunity credit
=$16,146 Can be used against the 1099-Q
Box 1 of the 1099-Q is $16,709
Box 2 is $4126
16,146 / 16,709 =96.63% of the earnings are tax free; 3.37% are taxable
0.0337 x 4126 = $139
You have $139of taxable income and a 10% penalty for a non qualified distribution
Example 2:
$16,146 in educational expenses
- $0 paid by tax free scholarship
- 4000 used to claim the American Opportunity credit
=$12,146 Can be used against the 1099-Q
Box 1 of the 1099-Q is $16,709
Box 2 is $4126
12,146 / 16,709 =72.69% of the earnings are tax free; 27.31% are taxable
0.2731 x 4126 = $1127
You have $1127 of taxable income but get a $2500 Tax Credit (assuming you're otherwise eligible. Only $139 of the $1127 would be subject to the 10% penalty. Claiming a credit is a penalty exception.
You may claim "board" (food) even if your student lives at home. You may claim your actual cost or the school meal plan charge, for on campus residents, whichever is less. For example purposes, I'll use $3800 (my son's school charge per year).
Example 3:
$16,146 in educational expenses
+ 3, 800 Board
- $0 paid by tax free scholarship
- 4000 used to claim the American Opportunity credit
=$15,946 Can be used against the 1099-Q
Box 1 of the 1099-Q is $16,709
Box 2 is $4126
15946 / 16,709 =95.43% of the earnings are tax free; 4.57% are taxable
0.0457 x 4126 = $188
You have $188 of taxable income and get the $2500 Tax credit
