Q. Can you explain exactly how this works?
A. See example above (below the line on my 1st post)
$14000 tuition minus 1400 to scholarship and $4000 to AOTC = $8600 for the 1099-Qs
8600 + 5000 R&B + $500 books&fees = $14,100 expenses for the 1099-Qs
$14,100 - 13,000 for the 1st 1099-Q = $1100 for the 2nd
1100/ 5000 = 22% of the distribution is qualified. 78% of the earnings are taxable. 0.78 x $900 = $702 reportable income. That is not enough income for the student to have to file.
"What if" we first allocate the expenses to the 2nd 1099-Q. 14,100 - 5000 = $9100 expenses for the 1st 1099-Q.
9100 / 13,000 = 70% qualified. 30% of the earning are taxable. 0.30 x 7000 = $2100 taxable income (vs $702 the other way).
