My tax software won't let me reduce my AOC credit so it appears I owe a penalty. How do I fix that?

[Anonymous]

Every tax program I've used assigns $4000 to the AOC credit. As a result, it looks like I've taken out too much money from my 529 funds and have to pay a penalty on the money as well as taxes. Is there a way to change the AOC credit information and just claim $2000 for the credit? That way, it won't look like I took out too many 529 funds. I know I'll get a lower AOC credit, but I'm fine with that. I can't seem to figure out a way to do this and may have to do it by hand, but I'm wondering if I've missed something. Thanks for your help!

[Hal_Al · Accepted solution]

Go through the education section again. When you get to the screen that says “Here’s your Education Summary”.  Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.

[Anonymous]

Okay, thank you. I'll try that!

[Hal_Al]

Claiming a tuition credit, instaed of using the tuition to offset a 529 distribution is an exception to the 10% non qualified distribution penalty. You still have to pay tax on a portion of the distribution, but not the penalty.

Usually the credit is more generous and your are advised to use the full $4000 for the credit.

Example:
  $10,000 in educational expenses(including room & board)
   -$3000 paid by tax free scholarship
   -$4000 used to claim the American Opportunity credit
 =$3000 Can be used against the 1099-Q

Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)

[Anonymous]

So do I just enter the taxable information under the income section? Also, if the program says I owe a penalty, how do I fix that? Thanks for your help Hal_Al.

[Hal_Al]

No, do not enter in the income section.  Enter at the 1099-Q screen.  
TurboTax *should* give you a screen to enter the penalty exception info.  If it appears to be charging the 10% penalty,  try typing> form 5329 >in the find box.
If you desktop software, you can enter the penalty exception directly on form 5329. With online program, you have to use the interview.

[Anonymous]

Thank you!