Question about 529 and AOTC

[jlonker]

We paid tuition of ~$43k and room & board of ~$15k. We funded the total of $58k using $49k from 529 with the remainder with our daughter taking out loans ($6k) and scholarships for the remainder.

Can we qualify for the American Opportunity Credit? Our tax program is saying no as tuition was covered by 529, but the 529 withdrawal should be allocated to both tuition and room & board and the $6k of loans should qualify. However, I can’t figure out how to make TurboTax do that allocation.

[MinhT1 · Accepted solution]

You cannot use the same dollars of tuition to both claim the AOC and to justify the 1099-Q distribution. That would be double-dipping.

Tuition paid from student loans is considered as paid out-pocket,

In general, if your daughter is eligible for the AOC, the best solution to maximize tax benefits is to apportion the first $4,000 of qualified education expenses to use for the AOC and the balance for justification of the 1099-Q withdrawal. Please note that for the purpose of the 1099-Q, you can count room and board. This way, you will get a credit of $2,500 for the AOC. 

In your case you apportion $4k of tuition for the AOC to get the tax credit of $2,500), leaving $41k of tuition and $15k, which together more than covers the distribution of $49k from the 529.

As the remaining tuition and room and board, more than covers the 529 distribution, you do not even need to enter the 1099-Q on your tax return, You just keep it in your tax records with the proof of payment in case of an IRS audit.

In fact, on form 1099-Q, instructions to the recipient read: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

[jlonker]

THANK YOU!