I am trying to see if I qualify for credit. I used 529 funds to pay for some of my daughter's College Expenses in 2009. I had $2500 in qualified expenses (tuition, books,etc) $4000 in Room & Board. I withdrew $5500 from 529. On my 1099Q my earnings are $1000.00 and Basis is $4500. So $4500 are my own contributions, it is only $1000 that I got a tax break on so I am not double dipping if part of the $4500 is used towards my qualified expenses. Therefore I can take the entire $2500 as qualified expenses?

If you or your daughter can claim the credit on $2,500 of expenses (to produce a $2,125 American Opportunity tax credit), you must then reduce your qualified 529 expenses from $6,500 to $4,000. You multiply the $1,000 in earnings from your 1099-Q by the qualified percentage ($4,000 divided by $5,500 in total distributions = 72.73%) which produces tax-free earnings of $727, leaving taxable earnings of $273. The $273 is reported on your daughter's return if the 1099-Q went to her social security number. I suspect she is in a very low tax bracket, if not zero. There is no 10% penalty tax on the $273, because the penalty is waived when the income is the result of the credit adjustment.

Joe

Thanks for your help. You are correct. The 1099Q is in her name and she is in the zero tax bracket. If I do report the $273 on her tax return does this mean she would file for the American Opportunity tax credit and I would not claim her as adependent on my tax return?

She will report the $273 on her tax return regardless of which return you claim the credit on.

Joe

I finally understand all this! Thanks so much for your help. Before looking on your website, I thought I didn't qualify for the American Education Credit because I took a withdrwal from my 529. Since I put the new qualified expenses on my tax return, I am now getting an additional $1,238 back in refund. ( I am partially phased out because our income is a bit over the 160K) I wonder how many other people are just assuming they don't qualify. You really need to look at the figures and pay the tax on the 529 distributions on your child's return if necessary. With no 10% penalty, it really makes sense. I have two students in college next year, so I will be looking closely at how I take my distributions from their 529's this year. Thanks again for your help.

Glad to see things working out so well for you.

Joe

Thanks for the great info on this site. My quesiton is about room and board being a qualified expense for 529 distributions. My son is a full-time Junior and living off campus. According to Pub 970, I can't include the money we paid for his rent as a qualified expense? Also, he spends most of his day on-campus so I purchased a meal plan through the university - is that a qualified expense? Thanks

If your son is living off-campus,(MUST BE enrolled at least half-time) you can use 529 withdrawals up to the amount the college lists as its cost-of-attendance allowance for R&B as reported to the U.S. Depart. of Education. Keep a record his expenses for room & board in the event you hear from the IRS. Your Rent payments & food plan up to the amount listed by the college should count as qualified expense. Additionally, the (AARA,) (a/k/a as the Stimulus Bill,) now permits computer technology and equipment, or Internet access and related services purchased for eligible students under a 529 Plan for 2009 and 2010.

See Publication 970 -- pg 67 #4

I found the estimated cost of attendance info. It lists Commuter ($2768)and University Housing ($7934) as the only two options. There is a column for min. cost but that had $0. My son's rent + meal plan for 2009 was just over $8,000. So I'm wondering, can I use $7934 of that for qualified expenses, even though he didn't actual living in University housing?

You may need to contact the university to get the actual amount (allowance) as reported to the U.S. Dept of Edu. The amount is not necessarily the University Housing amount, but may in fact be the same for off campus--not living at home. The amount you have listed seems reasonable, but I would check with the school to get the EXACT amount allowable. They should be able to give you the R&B off campus (not living at home) allowance which is the maximum amount you can use as a qualified expense for R&B from the 529 plan.