Can I use the same education expense to calculate both an education credit and taxability of 529 or ESA distributions?
No. You can, however, claim an education credit in the same year as you take a tax-free distribution from a 529 plan or ESA, as long as you don’t use the same expense for both to do your calculations.
You withdrew $4500 this year from your 529 plan or ESA, and you claimed an American opportunity credit using $4000 worth of expenses.
Your qualified expenses were:
- Tuition and fees - $6000
- Room and board - $3000 (So $6000 + $3000 = a total of $9000)
- (Minus the expenses you used for the American opportunity credit - $4000)
- (New total) Adjusted qualified expenses - $5000
So, since your adjusted qualified expenses are the same or more than what you withdrew from your 529 plan or ESA, you don’t get taxed. This means that even if you receive a 1099-Q, you don’t have to report nontaxable distributions on your tax return.
Remember that room and board isn’t an allowed deduction for education credits but you can pay for it using distributions from a 529 plan or ESA.