IRA distribution and American Opportunity Tax Credit

[mitkarthik]

My spouse will be going to grad school this year. So this question is primarily for tax planning purpose. 

I understand I can take an early distribution of upto $10000 from my IRA for qualified education expenses. I also understand that I can claim $2500 credit for upto $4000 of my education expenses through American Opportunity Tax credit. 

Assuming the total expense is approx $10000. Am I eligible to claim both or either one. In which case I should be withdrawing only $6000 from my IRA since the remaining $4000 is covered by the American Opportunity Tax credit.

[Fern · Accepted solution]

The American Opportunity Credit is not available for graduate studies.  It is only for students who have not completed the first four years of post-secondary education as of the beginning of the taxable year.

You may qualify for the Lifetime Learning Credit instead.

To qualify for the Lifetime Learning credit, you must have tuition and fees expense paid to a post-secondary school. You can claim the credit for any post-secondary classes you take; you don't have to be working towards a degree.
 
You can include the cost of tuition, fees and any books or supplies you are required to purchase directly from the school. The maximum credit you can claim is 20 percent of up to $10,000 in eligible costs or $2,000.

To qualify your income cannot exceed $130,000 if married filing jointly; $65,000 if single, head of household, or qualifying widow(er).  You cannot use the married filing separately status.

This is a nonrefundable credit so it is limited to the amount of tax you must pay on your taxable income.

You will still be subject to income tax on the IRA withdrawal.  The tuition exception will allow you to avoid the penalty for early withdrawal only.

You can take the education credit and the penalty exception in the same tax year.

[mitkarthik]

Thanks for clarifying my misunderstanding.

One more question in this regard, when you say
To qualify your income cannot exceed $130,000 if married filing jointly.
does it mean the total income or the Adjusted Gross income(after deductions)