Can I claim the American Opportunity Credit if my grandparents paid my tuition out of a 529?

[crule97]

I am a 23 year old and I support myself. This will be my second year of college. The only thing my grandparents pay for is my tuition, but they do pay it out of a 529.

[Critter-3]

Expenses paid from a 529 plan cannot be used for the AOC.  

[Opus 17]

Do you pay room and board to college?

[crule97]

No I do not

[Opus 17]

You can’t claim any tax credits if tuition was already paid with tax-free money.  

Now, if you had paid room and board, then you could consider part of that is tuition eligible for the credit, in this way:

Suppose $10,000 of tuition is paid from the 529 and you paid $5000 room and board out of pocket.  You could treat the 529 payment as going $5000 to tuition and $5000 to room and board, and treat the $5000 you paid as going toward tuition, and then claim the credit.  

But since you paid nothing, then nothing is eligible for the credit.  

[crule97]

Thank you! 

[Hal_Al]

Q.  Can I claim the American Opportunity Credit if my grandparents paid my tuition out of a 529?

A.  Yes, maybe (probably).

As others have indicated, "double dipping" is not allowed.  That is, you cannot count the same college expenses for the American Opportunity Credit  (AOC) that your grandparents claimed for the 529 distribution to be tax free. 

But there are some options available.  Room and board are also qualified expenses, even if you live at home. Your grandparents may claim the meal plan amount your college charges on campus students.  If you actually pay rent, they may claim that amount or the college's room charge, whichever is less.  If you live at home, rent free, it's not clear that "room" is allowed.

Another alternative, is for your grandparents to pay some tax on the 529 distribution*, to free up expenses for you to claim the AOC.  The family comes out ahead as the AOC is a much bigger tax benefit.  The penalty (but not the tax) is waived on the 529 plan distribution under that scenario.  This assumes that either  you or your parents, if you are their dependent, are eligible for the AOC.

Books and other course materials (including computers) are eligible expenses for either the AOC and/or 529 distribution. 

*Example

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount your grandparents can use to claim the earnings exclusion on the 1099-Q. 

  $7,000 in educational expenses

   -$4000 used to claim the American Opportunity credit  (by the student or his parents)

 =$3000 Can be used against the 1099-Q (on the grandparent's return)

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

The grandparent's have $240 of taxable income (600-360).  

For 529 plans, there is an “owner” (usually the parent, but apparently the grandparent in this case), and a “beneficiary” (usually the student ). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the 529 plan to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return. The recipient's name & SS# will be on the 1099-Q.

[Hal_Al]

There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants.  It is usually best if the parent claims that credit. 

You cannot claim a credit if you are, or can be, claimed as a dependent by someone else.