Since all your education expenses were used for the American Opportunity Tax Credit (AOTC), your $2000 in 529 plan earnings is considered a non-qualified withdrawal. This means:
- The $2000 is subject to federal income tax and a 10% penalty
- For Virginia state taxes, the $2000 earnings are also taxable
- There should be no tax on the $1441 principal since contributions were made with after-tax dollars
For more details, check out the Virginia529 Withdrawal Guide (page 6) and the IRS guidelines on 529 plans see second Q.
