Claiming the American Opportunity Tax Credit / Florida Prepaid

[MGM808]

Just filed my 2023 tax return and then discovered info I didn't know.  Now I'm thinking I need to amend my return.  I claimed the AOTC on my tax return using Form 1098T I received for my son who is in his first year of college and I'm concerned his payout from the Florida Prepaid will be taxable as a result. 

His college tuition is partially paid directly to the school from the Florida Prepaid (tuition only program).  The tuition portion that the FL Prepaid does not cover, along with fees, books and room & board are being paid by fed loans and me.   Below are my numbers:

Qualified tuition & fees paid:  $2690.96 per the schools account activity however the 1098T, box 1 only shows $2403.92 for some reason but used it anyway in my return.

Books & supplies paid:  $415.95

Total actual adjusted qualified expenses: $3106.91.  Form 8863 calculated adjusted qualified expenses of $2820 ($2403.92 + $415.95)

Received Form 1099Q showing $1873.28 in box 1 and 3 for the Florida Prepaid payout.

So it appears I used $2820 in qualified expenses for the AOTC leaving $286.91 in qualified expenses remaining. 

Since I do not have enough qualified expenses remaining to offset the Florida Prepaid payout of $1873.28, will my son have to report this amount as income on his 2023 return?  He does not have any other income to report.  It appears the payout does not have a taxable component to it (the distribution is all base).  Does this matter?

thanks!

[Hal_Al · Accepted solution]

Q.  Will my son have to report this amount as income on his 2023 return? 

A. No, for a couple of reasons. Read on.

Q.   It appears the payout does not have a taxable component to it (the distribution is all base).  Does this matter?

A. Yes, only the earnings portion of a 529 plan (technically the prepay plan is a 529 plan) is taxable.  Since there were no earnings, there's no tax or penalty .

But, that's academic. Even though the  Florida Prepaid Plan may only be disbursed for tuition, at tax time you may allocate it to other expenses, in particular room & board, an authorized 529 plan expense.  So, you can claim both the AOTC and a tax free distribution from the Prepaid Plan, without double dipping on the tuition.  R&b is a qualified 529 plan expense, even if the student lives off campus or  at home. 

Reference: https://www.myfloridaprepaid.com/resources/529-basics/#:~:text=There%20are%20two%20types%20of,author....

[MGM808]

Finally an explanation I can understand!  Good to know, thank you!