That's correct. $30K of the $55K expenses is used for the IRA and $25K for the 529 plan. No kiddie tax or even regular tax is due
Alternatively, you could use $40K of the total $55k of expenses against the IRA withdrawal, totally eliminating the IRA penalty, and only $15K against the 529 distribution, making $4000 (40% of $10K [25-15=10]) subject to tax and penalty. Your original question was "May I offset the 10% IRA penalty with a 529 payment". So, yes, sort of. You can use the expenses that were paid for by the 529 plan to off set the IRA penalty, as long as you don't use the same expenses to claim the 529 plan earnings exclusion. It's probably not a good idea, as that portion of the 529 Plan distribution will be subject to a 10% penalty, in addition to the tax. But the only way to be sure is crunch the numbers to see which way you come out better.
