No. It works this way*: you have a 10K 529 plan withdrawal but only 8K of qualifying expenses. This means that 80% (8,000/10,000) of the earnings is tax free, 0.80 x 4,000 = $3200. You have $800 (4000-3200) of taxable income.
"the 529 withdrawal was paid directly to the school" is important info. This means the withdrawal is reported on the student's return, not the parent's**. He/she will have $800 of income, not you. It is considered investment income and subject to the "kiddie tax".
*assuming you want to assign the 1st 10K of expenses to the IRA.
**For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the 1099-Q can be either the owner or the beneficiary depending on where the money was sent***. When the money goes directly from the 529 Plan to the school, the student is the "recipient". The 1099-Q gets reported on the recipient's return. ***When you request a withdrawal from the plan, they usually give you three choices: 1. Send it to the owner (you), 2. Sent it to the beneficiary, or 3. Send it to the school.
