Not sure I fully follow the logic. Per your note the following is possible, which I think is not correct.
Scenario:
- Parents are filing tax return as Joint
- Parents income for the year is ~90,000
- Parents include student (son/daughter) as a dependent
- Student had earned income (~12,000) and therefore is filing a tax return
- Student does not report 1099-Q distributions that were used for qualified expenses
- Because parents income is below income cut-off level:
- IRS will allow parents to claim AOC of 2500
Per my thinking distributions from ESA were used to pay the tuition but IRS is unaware of this fact. I don't know if TT will ask parents if money used to pay 1098-T reported amount came from a ESA. Per my experience it does not. Let me know if something I stated above is not correct i.e. this scenario is not possible.
Regards,
Ramesh
