Greetings David:
You will need to document your withdrawals to a matching expense in case of audit. Keep a copy of the housing expense as listed by the college and create a receipt to match the distribution to. It doesn't have to be anything fancy.
You can claim the American Opportunity Tax Credit (AOTC) while taking advantage of the tax benefits of 529 plans, but you need to make sure not to double-dip. For example, the AOTC allows a maximum credit of $2,500 on $4,000 in eligible expenses. So if you have $10,000 in qualified expenses to pay for, you can use $4,000 to generate the AOTC and take a tax-free withdrawal of $6,000 from your 529 plan. If you end up taking the full $10,000 from your 529 plan you’ll end up with a $4,000 non-qualified withdrawal, and will have to pay income tax on the earnings portion.
You can find more information here:
- http://www.savingforcollege.com/articles/ask-an-expert-american-opportunity-tax-credit-765
- http://www.savingforcollege.com/articles/ask-an-expert-american-opportunity-tax-credit-765
Good luck,
Brian Boswell
VP, Research & Development
This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.