College Planning Question / Coordination

[Bjorn]

Aloha,

If a party has put 10,000 into a 529 over the years and let's say the value is now 10,000.00 just to keep is easy.

Can we take the generous AOC credit since it is just getting their own money back?

Or, is there some rule anything {principal or earnings} that comes out of a 529 is a double tip?

Mahalo,

Bjorn

[Roland Slugg]

I am not aware of any rule that limits or denies eligibility for the AOC based on the funds coming out of a 529 plan, and I don't believe there are any such restrictions. It would make no sense, since there is no tax deduction for funds going into a 529 plan, and no tax payable on the funds coming out (except for the earnings thereon if not used for qualified educational purposes). Thus if a taxpayer meets all the AOC qualifications, he should claim it on his federal tax return.

[appelman]

No double-dipping

From Pub. 970:

"No Double Benefit Allowed
You cannot do any of the following...
· Claim an American opportunity credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program."

and, from Chapter 8:

"Coordination With American Opportunity and Lifetime Learning Credits
An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit."

[Gary2]

Work through the example in Pub. 570, and remember that there are expenses such as room and board that are valid for the 529 but not the AOC.

But getting back to basics, you're only ever taxed on the earnings in the 529. No earnings, no tax, regardless of the AOC.

[ttbtaxes]

It may be more beneficial to forego the 529 exclusion, pay tax on the interest and claim the AOC. You have to crunch the numbers.

[Golden Rocket]

Common Sense

It may be more beneficial to forego the 529 exclusion, pay tax on the interest and claim the AOC. You have to crunch the numbers.

It's hard to imagine a scenario where a 529 would be more beneficial than a typical savings/brokerage account in the name of the minor child under UGMA. After age 14 might be a problem for some folks.

Unless there is a whopping amount of $$ being saved, the income generated would in the early years not even be enough to file a tax return on the child. Then when child reaches age, there are no restrictions on the money, no hoops to jump through, no 1099s from the plan, etc. In fact, there are no restrictions on the money at ANY age. I would say only in years 14-17 would there be a problem if there's enough income to force reporting at parents' rate.

I do have clients that smile at me as if they've done something real smart and say "I started a 529 plan for my kid, isn't that great??" What usually has happened is some salesman has suckered the parents into thinking they'll save a ton of money in taxes if they just buy into his 529 plan.

[Lion]

I've had parents/grandparents that put the max ($55,000 or so?) into 529 plans. No current tax on earnings. Child can't take the money and run off with a motorcycle gang. Doesn't kill the kid on the FAFSA since parent is the owner not the child, so the 36% or whatever they think the child should pay from his assets is the 6% or whatever from the parents' assets instead. If first child is brilliant and gets lots of scholarships, then change 529 beneficiary to another child or even parent go back to school.

I've never recommended 529 plans over other forms of savings. In fact, I rather like the flexibility of Roths for my clients with low enough incomes to qualify and for their children with earned income. But like you, I've had parents come in to tell me what they did last year. And, we work out how to make the best of it.

For front-loading with deferred tax, they do work well.

[appelman]

Don't forget the penalty.

It may be more beneficial to forego the 529 exclusion, pay tax on the interest and claim the AOC. You have to crunch the numbers.

It might still be beneficial, but you will want to check.

[mactoolsix]

Publication 970

Work through the example in Pub. 570, and remember that there are expenses such as room and board that are valid for the 529 but not the AOC.

But getting back to basics, you're only ever taxed on the earnings in the 529. No earnings, no tax, regardless of the AOC.

See publication 970, page 56 "Coordination with AOC & Lifetime Learning"

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