Education Credit & 529 Plan

[Crank]

If a TP uses 529 Qualified Tuition Plan (QTP) funds to pay for the 1st four years of college does this sound right for also claiming the American Opportunity Credit?

Education expenses paid from QTP $12,000

Books paid out of pocket of $1,500

Total Qualified Education Expenses $13,500

QTP Earnings $4,000

Qualified Expenses= $13,500 - $4,000 applied to the AOC credit = $9,500 Adjusted Qualified Education Expenses

Tax Free QTP Earnings Distribution = $9,500 / $12,000 = 79.17% x $4,000 (QTP Earnings)= $3,167

Taxable QTP Earnings Distribution = $4,000 - $3,167 = $833 to Line 21 Other income.

So the taxpayer would get both the Tax Free earnings from the Qualified Tuition Program (79% of the $4,000 or $3,167) & the full American Opportunity Credit of $2,500.

This is what I get from page 68-69 of pub 970 but it just doesnt seem right as the taxpayer is getting the full AOC credit plus $3,167 of tax free earnings fromn the QTP which seems like double dipping to me.

Is this correct or not?

The alternative would be to ignore the $12,000 QTP since it was used for Qualified Education Expenses and apply the $1500 paid for books "out of pocket" to the AOC.

Any help is greatly appreciated. Thanks

[Crank]

Bump.

Any thoughts at all on this would be extremely helpful!

Thanks

[SaraEA]

Where you're going wrong is just in the way you're thinking about it, not in the math. Instead of focusing on the earnings, remember that you're deducting the QTP distribution from the qualifying education expenses. You can't use the same expenses to claim more than one education tax break (i.e., no double dipping). Your client paid $13,500 in education expenses. $13.500-$12,000 QTP distribution = $1,500 adjusted qualified education expenses (available for the American Opportunity Credit or tuition deduction). See page 55 of Pub 970.

You're going to have to figure your client's taxes multiple ways to see what works best. If they claim the full amount of the QTP for education expenses, they can still get a $1500 AOC credit, or if their AGI is too high they can claim a $1500 tuition deduction. (If their state income tax starts with federal AGI, this may be the better option even if it makes their federal tax higher.) Or they give up the tax break of using the full QTP to reduce their qualifying education expenses if that works out better for them. For example, they can claim the $4000 tuition deduction and thus have $9,500 in adjusted qualified education expenses. Thus: $4000 earnings X $9500/$12,000 distribution = $3167 tax free earnings, and the rest of earnings taxable. (Might really help on the state return.) The same math applies to the AOC if they are eligible and it won't raise their state tax too much.

Hope this helps focus your thinking.

[Pacun]

Keep in mind that if you go with Tuition Deduction, you will have to wait until St. Valentine's day to file the return. So, it there is not much difference and clients want their refund (if any) soon, you should go with the other credit.

[Crank]

Thank you so much for the replies.

I just knew that it seemed like double dipping. So basically the books paid out of pocket (not through a QTP distribution) will qualify for the AOC credit. I was really wracking my brain over this one. Hopefully the remainder of the tax season will be much easier... haha.