It depends on the amount. Your 529 distribution should first be counted as room and board with the remainder to tuition. This leaves room for his scholarship income to cover tuition. You also have to factor in if you are claiming the education credit out of the tuition money. There are too many factors without real numbers. Example:
Room and board is not a qualified expense for AOTC, but it is a qualified expense for the 529. For full details, see 529 for Room and Board. Did all of it go to room and board?
- Yes - delete the 1099-Q and concentrate on the AOTC
- No but all of it went to qualified expenses: delete the 1099-Q and subtract the portion paid to qualified expenses from the qualified expenses.
- No - the 529 was bigger than all of the above expenses. The amount beyond room, board, tuition, books, etc is taxable. This is not common and it sounds like you know you have some money paid to qualify for the AOTC.
Example of no- but went to qualified expenses:
- $15,000 529 distribution. $12,000 went to room and board with $3,000 towards tuition, books, etc.
- 1098T shows $12,000 tuition. Plus you have additional expenses of $1,000 for books and miscellaneous.
- The 529 paid $3,000 towards the tuition and books. If we subtract the $3,000 from the amount paid for tuition and books, we have $13,000- $3,000 = $10,000 actually spent out of pocket.
- Any amount over $4,000 for tuition expenses paid out of pocket is extra, not needed for calculating the AOTC.*
- Any excess amount can be used by the scholarship. Any scholarship in excess of that is taxable income.
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