My daughter received enough scholarship to cover her tuition, fees, textbooks, room and board. I have invested 529 for her. Now that she received enough money for her college education, there is no need to use the 529 fund to pay for her college expenses.
Suppose her scholarships totals $25000, of which $15000 covers tuition, fees and textbooks. This $15000 is tax-free scholarships as tuition, fees, and textbooks are qualified expenses according to IRS. The $10000 scholarships that are used to pay for the room and boards are taxable as they are non-qualified expenses according to IRS. However, for 529, room and board expenses are qualified expenses, so they are tax-free for 529 withdrawal.
My questions are:
If I withdraw from 529 up to the scholarship award ($25000), do I need to pay the 10% penalty on the taxable $10000 scholarships (paid for room and boards)? I assume I do not need to pay the penalty for the tax-free $15000 scholarships (tuition, fees and textbooks).
We need to pay income tax on the full $25000 withdrawal from 529, correct?
On tax return, I need to pay both the income tax on the 529 withdrawal $25000) and the income tax on the taxable part of the $10000 scholarships (for room and boards), correct?
Thank you for taking time to answer my questions.