I have read through questions/answers on this forum but want to be sure my "takeaway" is correct for the following scenario:
1098-T has $42,000 in Box 1 payments for tuition and required fees. Added $210 for required books for total expenses meeting AOTC definition of qualifying education expenses of $42,210 ($42,000 + $210). Son received $30,000 scholarship, $2600 Pell Grant, $250 refund for total of $32,850 in tax free educational assistance. From the $42,210 in educational expenses, will subtract the $32,850 leaving $9150 in qualified expenses for AOTC and 529 payments. Son also had $4424 in additional expenses for room/board/internet/utilities that do not qualify for AOTC, but meet definition of qualified expenses for 529 distributions.
Son got 1099-Q with Box 1 distribution amount of $12,000 from 529 plan. Parents got 1099-Q for $2000 Box 1 Distributions from 529 plan.
Parents plan to: Reduce the $9150 in AOTC qualifying expenses by $4000 so parents can claim AOTC. Will further reduce the AOTC qualifying expenses by $2000 to cover 100% of parents 1099-Q distribution. This will leave $3150 ($9150 - $6000) in qualifying educational expenses. Will add the $4424 of additional expenses that qualify for 529 distributions for a total of $7574 in qualifying 529 expenses that have not already been used to offset tax free educational assistance and AOTC credit. Will subtract $7574 from son’s $12,000 1099-Q distribution, leaving $4426 to declare as income on son’s tax return. I’m not sure if the whole $4426 is declared as income since my son did not actually contribute to the 529 plan, so the entire $4426 is new income to him, or, if we still run the calculation to determine the taxable portion of the $4426 distribution and only report the taxable portion. Is this treatment appropriate and do we report the entire $4426 as son’s income, or just the taxable portion?
