In 2023, I arranged for distributions to my children out of the remaining balance of their 529 accounts. I sized the withdrawals taking account of their other income to minimize the tax impact. Or so I thought. Instead, in addition to the 10% penalty, TT is telling me that they are liable for 10% in income taxes even though they are inside of the first tax bracket. No deduction for this income?
In addition to that, it's asking for my income (taxable? AGI? MAGI?) and then making further adjustments to tax due on account of these withdrawals. The kids were 21 or younger in 2023. I'm guessing this has something to do with the kiddie tax? And as to this, I will file an extension so don't actually know where my 2023 income will come out. How do I handle this issue?
Finally, is there a way to achieve what I sought by handling matters differently?
