My wife attended grad school, requiring $5650 in tuition. We paid part of this tuition using $5606 of 529 funds. The earnings on the 529 funds was $5.07, per our 1099-Q. Is it possible and legal to consider all of the distributions from the 529 account as "non-qualified expenses" and opt to pay the taxes on the earnings of the 529 account rather than reducing the amount of the Lifetime Learning Credit (LLC)? Or are we forced to reduce the Lifetime Learning Credit by the amount of 529 distributions? Reducing the LLC results in a smaller tax refund than if we were to pay income tax on the $5.07 worth of earnings on the 529 accounts. In prior years, our tax pro said we MUST reduce the LLC, but several sources and tax software platforms are stating we can choose how to combine the 529 distributions and LLC.
