Q. where are you getting 3000/5000 numbers??
A. See red numbers in example. $3000 is your net qualified educational expenses (QEE). $5000 is your distribution from the 529 plan. So, $2000 (5000 - 3000) of the distribution in non qualified.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q (usually on the student’s return)
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000 / 5000 = 60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
Alternatively: 2000 non qualified distribution divided by 5000 total distribution (2000 / 5000) = 40% of the distribution is non qualified
40% x $600 earnings (box 2 of 1099-Q) = $240 of taxable income.
