Q. One $2K unrestricted scholarship we reclaimed from the 529 – after it was applied to R&B on direct bill. Can we still count this (if paying taxes on it) toward allowed 529 expenses (R&B)?
A. Yes. Look at it this way: for QEE accounting, the taxable scholarship didn't pay for anything. It's just income. You're free to allocate $2000 R&B to the 529 distribution. It's a qualified expense for the 529 distribution.
Q. So does that increase 529 QEE out of $14,693 total distribution?
A. Increases it.
Q. Another ~ $2K unrestricted scholarship we took as a refund direct from the college and applied to living expenses. If taxed on it, does this increase or reduce our 529 QEE out of total distribution?
A. Increases it. Because the $2k is taxed, it's only income. It does not have to be allocated to any expenses at tax filing time.
Q. Also, since our kid has tax-free scholarship more than triple the amount of 529 NQEE, I assume there's no 10% tax penalty on 529 NQEE?
A. Yes. But, better yet, just allocate the expenses to the 529 distribution, not the scholarship taxable income.
