529 Distribution, Scholarships, Qualified Education Expenses, AOTC

Forum|Forum|4 years ago
March 24, 2022
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My daughter is a college freshman, started fall 2021. First time dealing with AOTC, 529 distributions, etc.

1098-T Box 1 qualified tuition payments: $31,175
1098-T Box 5 scholarships: $27,112
1099-Q (529 distribution) Box 1: $4,338 ($607 earnings, $3,731 basis)
Cashed EE bonds: $792 proceeds, $242 of which was interest
Daughter had $6,866 in 2021 W2 earnings
Parents married filing jointly, MAGI $66k
Can/should we put $4,792 of the scholarships on our daughter's return as earned income? $6,866+$4,792=$11,658 so with standard deduction she would still have zero tax.
We would then be able to say all of the 529 distribution and EE bonds went to qualified expenses, and $4,000 out-of-pocket went to qualified expenses, so we get the full $2,500 AOTC?
Thanks!

Best answer by Hal_Al

Yes, you can claim some of the scholarship as taxable to free up expenses for the AOTC, as long as the scholarship is not restricted to paying for tuition. And you are correct, that is not enough total earned income for her to have to pay tax or even file a return.

But, books and a computer are also qualified expenses and room and board are qualified expenses for a 1099-Q, even if she lives a home.

Either way, you get the $2500 AOTC and she pays no tax.

Hal_AlAnswer

Employee

But, books and a computer are also qualified expenses and room and board are qualified expenses for a 1099-Q, even if she lives a home.

Either way, you get the $2500 AOTC and she pays no tax.

Hal_Al

Employee

If you have any more EE bonds, you can cash them and put the proceeds into the 529 plan. That effectively makes the proceeds eligible for room and board, since the actual payments will come from the 529 plan. Putting USSB proceeds into a 529 is considered a qualified educational expense (must be done within 60 days of cashing the bonds). This may (most states) also qualify for a deduction for a 529 contribution on the state return.