Qualified 529 Programs

[S T]

We have had the discussions of the high school student attending college classes and whether or not the tuition qualifies for Lifetime Learning Credit - I believe it does

New question associated with this. If parent/s have a Qualified Education Program under Sections 529/530 (in this case Qualified Tuition Program), and have the amount distributed for the Tuituion, is that a qualified education expense to eliminate the taxable earnings?

And if I can use the Tuition for the College Classes to reduce the 1099Q distribution taxable portion, I can not use the Lifetime Learning Credit.

I either use a Lifetime Learning Credit OR I use the Tuition amount to offset the taxable 1099Q distribution?

Am I understanding this correctly?



Thanks,

Sandy

[erchess]

My Reaction

I think you're right on, based on what I read in TTB but I have to admit that I went no farther. The Tuition And Fees Deduction requires that the student possess a high school diploma or GED. The Hope Credit requires that one be in the first two years of a post secondary degree program. If there were similar restrictions on the Lifetime Learning Credit that didn't get mentioned I think at the very least TMI would have some explaining to do. Honestly I just can't imagine Bees Paul or Brad being part of an outfit that would mess up so massively. As far as using the QTP goes it is clear that you could not use it for regular high school or lower expenses, but the way I read TTB it is the school rather than the student that is controlling. Again I just have to believe that if there were a problem our primer would tell us.

By the way thank you for this post. I needed to refresh my memory on this as when I first read your post I was sure that tax savings for education were only for students who are out of high school whether they graduated or dropped out.

[travis bickle]

Your analysis looks correct

We have had the discussions of the high school student attending college classes and whether or not the tuition qualifies for Lifetime Learning Credit - I believe it does

New question associated with this. If parent/s have a Qualified Education Program under Sections 529/530 (in this case Qualified Tuition Program), and have the amount distributed for the Tuituion, is that a qualified education expense to eliminate the taxable earnings?

And if I can use the Tuition for the College Classes to reduce the 1099Q distribution taxable portion, I can not use the Lifetime Learning Credit.

I either use a Lifetime Learning Credit OR I use the Tuition amount to offset the taxable 1099Q distribution?

Am I understanding this correctly?



Thanks,

Sandy

....if I am reading you right [I am kind of tired right now].

Here is a link to a very brief article that outlines your situation:

http://www.axa-equitable.com/plan/education/529-plans/same-year-as-hope-credit-or-lifetime-learning-credit.html

Two important items:
a) 529 distributions are not limited to tuition-use only. You can use the distribution for any legitimate education expense; this would include, but not be limited to, books, supplies, room, board, necessary transportation, etc.

b) if I "waived" a client's right to the Hope or Lifetime credit, I would document the particulars on WHY I chose to prepare the return the way I did. Otherwise the client WILL come back and say "You never advised me of . . . "

[S T]

More Clear

Thank you Travis for posting. I am having more of my client's kids reach that age for College, so will be seeing a lot more of this. I can't believe these "kids" have grown so fast, I have known a lot of them since they were babies!

Sandy

[BP.]

if I can use the Tuition for the College Classes to reduce the 1099Q distribution taxable portion, I can not use the Lifetime Learning Credit.

I either use a Lifetime Learning Credit OR I use the Tuition amount to offset the taxable 1099Q distribution?

Am I understanding this correctly?



Thanks,

Sandy

Not quite.

http://www.irs.gov/pub/irs-pdf/p970.pdf

See pub 970, esp. p. 55- Coordination of 529 plans with the education credits, for the formula to use.

And also TTB 12-5.

For 529 distributions that will be used for tuition and fees, first, use your tuition tax credits, then see if any prorated part of the earnings might be taxable.

[S T]

Either or Or

BP
Now I am confused.

I was understanding that it was not a requirement that the T/P take the Lifetime Credit, but could just use the amounts for Tuition and Books to offset taxable interest income on the 1099Q and eliminate some of the 10% penalty for taking an excessive distribution?

If that is so, then I would not have to do a basis adjustment on the 1099Q distribution, correct??

Sandy

[BP.]

BP
Now I am confused.

I was understanding that it was not a requirement that the T/P take the Lifetime Credit, but could just use the amounts for Tuition and Books to offset taxable interest income on the 1099Q and eliminate some of the 10% penalty for taking an excessive distribution?

If that is so, then I would not have to do a basis adjustment on the 1099Q distribution, correct??

Sandy

Yes, you can first use 529 funds for the allowable non-tuition expenses, and then use any more for the tuition and fees tax credits, then see about the taxable part of the earnings distributed. My post was specifically for the portion of the 1099Q that would be used for tuition and fees. There is no requirement to take the credit, but certainly usually more beneficial to use tax credits before figuring any taxable part of the distribution. (i.e.- tax paid may be less than tax credits received.)

So sorry to confuse! Looking at the formula should make it easier to understand. It may be better to do your basis adj- you have to work your particular numbers into the formula to see if taking the credit and then having a prorated amount of the earnings winding up as taxable is a better outcome for you.

[S T]

Thanks

Thanks BP -

In this case due to the very arge distributions not used for for College Expenses, it was better to just use all to try to minimize the 10% penalty on the earnings, rather than use the Lifetime Credit and adjust basis.

Just such a confusing issue!

Case by Case - Every situation is different! Guess that is what makes our jobs interesting.

Sandy