529 Earnings Tax in Place of Lifetime Learning Deduction?

Forum|Forum|2 years ago
January 29, 2024
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My wife attended grad school, requiring $5650 in tuition. We paid part of this tuition using $5606 of 529 funds. The earnings on the 529 funds was $5.07, per our 1099-Q. Is it possible and legal to consider all of the distributions from the 529 account as "non-qualified expenses" and opt to pay the taxes on the earnings of the 529 account rather than reducing the amount of the Lifetime Learning Credit (LLC)? Or are we forced to reduce the Lifetime Learning Credit by the amount of 529 distributions? Reducing the LLC results in a smaller tax refund than if we were to pay income tax on the $5.07 worth of earnings on the 529 accounts. In prior years, our tax pro said we MUST reduce the LLC, but several sources and tax software platforms are stating we can choose how to combine the 529 distributions and LLC.

Best answer by Hal_Al

Q. To clarify, the full $5650 from our 1098-T should be entered on Form 8863 and used to claim the Lifetime Learning Credit?
A. Yes.

Q. The $6 earnings portion of the 1099-Q should be input as income on Schedule 1, line 8z. Correct?

A. Yes. The description will be taxable portion of 529 distribution (or some such wording).

Q. No 10% penalty required since all of the $5060 529 funds were used for education and we are claiming education credit?

A. Yes. The $6 goes on line 6 of form 5329 to claim the exception to the penalty.

Hal_Al

Employee

Q. Is it possible and legal to consider all of the distributions from the 529 account as "non-qualified expenses" and opt to pay the taxes on the earnings of the 529 account rather than reducing the amount of the Lifetime Learning Credit (LLC)?

A. Yes. In fact, it is encouraged. If the 529 distribution is non qualified because the taxpayer elected to claim a tuition credit, the 10% penalty is waived.

magillmjAuthor

Thank you for the quick reply @Hal_Al! Just to clarify, the full $5650 from our 1098-T should be entered on Form 8863, and the $6 earnings portion of the 1099-Q should be input as income on Schule 1, correct? No 10% penalty required since all of the $5060 529 funds were used for education and we are claiming education credit? Thanks again