Hi,
My daughter completed a 2nd Bachelor's degree in May 2025. She turned 24 years old by the end of 2025, and she also got a job mid-year a received over $42000 in W2 wages in 2025. Last year, she was still a dependent and I had claimed the Lifetime Learning Credit on my return for tuition expenses for her 2nd degree. For her first four-year degree I used all 4 years of American Opportunity Credit. Her last semester expenses were in 2025. She also had a small student loan from early in her first college degree.
So, this is what I did to get the biggest refund for my family, regardless of whose return it was on.
I will use rounded number to make the illustration easy because I just want to check if this is valid:
I withdrew the last $8600 from the 529 plan where I am the owner and she is the beneficiary.
I used $3500 of it to clear out her student loan so she would have no future payments or interest.
So that lowered the non-qualified amount of the withdrawal to about $5100.
On the earnings part, it ended being about $3800 in extra taxable earnings.
So, I paid about a 10%, $380 penalty, plus I get taxed at my normal rate on those earnings.
I also had to "pay back" income subtractions I took on my Wisconsin state return for the extra $1300 income from the unqualified distribution which results in $68 in additional state tax.
She had a final semester tuition expense of about $6500
Since I forgot to consider that she is now nondependent due her age and income, I decided to put all of her last semester expenses on her return for the 1098T from her school and the 1099-Q 529 withdrawal on my return. I prepare her return and mine. This approach allowed her to claim a little over $1300 in Lifetime Learning Credit and also use the tuition as a $6500 deduction on her Wisconsin income which results in over $320 reduction in her Wisconsin taxes.
So in summary, I am a dad "taking one for team" in some tax penalties and extra taxes on my Married Filing Jointly Return with total up to $380 penalty + whatever normal tax rate the IRS applies to the extra $3800 + a $68 extra tax on my Wisconsin return so that my daughter can received over $1300 in Lifetime Learning Credit + $320 in state tax reduction.
This appears to get our family as a whole more tax refunds than if I just didn't report the 1099-Q since the 529 withdrawal total was less than the $3500 student loan payoff + $6500 for last semester tuition.
Is this a valid approach since it looks like she can claim the Lifetime Learning Credit and we can't on the parents return? I have not double dipped on anything and allocated all of the education expenses to someone's tax return
Thank you for any comments!
