American Opportunity Credit/Section 529 plan

[Jesse]

Section 529 fund used to pay $1,000 for tuition, income on this was only $9.

Am I understanding correctly - if the student includes the $9 as income on their return the $1,000 can be used for qualifying American Opportunity Credit?

[BP.]

Check pub 970 p. 55 for formula to see if any earnings on the 529 acct need to be included in income. First apply the AOC, then determine if any distribution is leftover. Of course your earnings here are so slight, there's likely no tax consequence if all $9 included in income.

[Jesse]

This is my understanding:

If my tuition is $1,000 and I w/draw $1,000 out of the 529 plan ($991 basis + $9 earnings) I can't use this tuition expense for the American Opportunity credit. That is the only cost and the only w/drawal.

However if the student elects to include the $9 as income then the $1,000 can be used as qualifying expense for the American Opportunity credit.

Is this correct?

[LCP]

This is my understanding:

If my tuition is $1,000 and I w/draw $1,000 out of the 529 plan ($991 basis + $9 earnings) I can't use this tuition expense for the American Opportunity credit. That is the only cost and the only w/drawal.

However if the student elects to include the $9 as income then the $1,000 can be used as qualifying expense for the American Opportunity credit.

Is this correct?

I sure wouldn't think so. The $991 went into the plan with after-tax dollars.... there is no double-dipping involved on that part.

[Kram BergGold]

Follow BP's Advice

BP has given you the correct answer. Check out the example's in the Pub.

[BP.]

However if the student elects to include the $9 as income then the $1,000 can be used as qualifying expense for the American Opportunity credit.

Is this correct?

Not really, though that might be the effective outcome of your particular case. Really gotta plug numbers into the formula on these 1099-Q's. And really gotta do the credits FIRST for best outcome.