Strategy: Paying college costs

[LCP]

In any given year, does the following work or are there ordering rules that would mess it up .......

1. Use regular money to pay for an optimal amount of tuition and fees in order to max your tax credits or deduction

2. Use 529 money to pay for the rest of the costs

[BP.]

You can use a 529 distribution to pay college costs and still take the deduction or credits you are eligible for. Read pub 970.

[LCP]

You can use a 529 distribution to pay college costs and still take the deduction or credits you are eligible for. Read pub 970.

...... but you can't use the same qualified expense for the credit as you did for a tax-free QTP distribution. (Paraphrased form Pub 970 p.11)

My concern was that QTP distributions might have to be used first against qulified tuition and fees forcing you to use regular money on room and board and not get the credit/deduction.

[LCP]

Revisiting this........ do all agree that you can't use 529 money to pay all college expenses and then claim some of those same expenses for credit purposes?

[BP.]

Coordinating educ benefits

Disgree. Working from last year's pub 970, p. 50: An educ credit can be claimed the same year as a TAX FREE dist from a QTP, as long as the same expenses are not used for both benefits. Why does this differ from your question today? You CAN USE the 529 money to pay for expenses, claim your educ credits, THEN possibly have some remaining taxable EARNINGS distribution. (In other words, NOT tax free.)

But you don't have to be concerned with any forced ordering rules. In fact, it is probably better to apply your credits first, then apply your QTP dist, then see if any earnings on the QTP are taxable. Use the formulas on p. 50 to establish any part of the earnings on the QTP (remember the contribs were NOT deductible when made) that may be taxable. You only need to know the amounts described on p. 49 as Total Qualified Educ Expenses (this includes the non-tuition expenses) and the amounts (contribs & earnings are given separately) on the 1099-Q. From your QEE, pull out the amounts you are able to use for the available educ credits, then apply your QTP dist to the remaining expenses. Just work the formula under "Coordination with Hope & LL Credits" and it should fall into place for you.

[Kram BergGold]

Check out Lasser's p. 543

There is a great example of how to figure the taxable portion of the earnings componant of the distribution when using QTP funds and claiming a tuition credit on page 543 of Lasser's.

[Bees Knees]

TTB, page 12-5 and 12-6 also has good examples of how to do this.

[LCP]

So basically I now understand that the parents can definately take the credit even if 529 funds are used ..................... however, it may give rise to taxable income to the student.

Do I also understand that the taxable income calculation is based on a ratio and is not as simple nor as beneficial as:

1. pay costs you want to use for credits with other money so no detrimental tax effect.

2. pay any additional costs with 529 money and no tax effect.