susieq

[susieq]

EDUCATION EXPENSES

Qualified Tuition & Fees $7,610
Room & Board 6,690


PAYMENTS MADE

Non taxable Scholarships/Grants $ 1,315

529 Plan Gross $7,500
Basis (2,151)
Net 5,439

Cash 4106

Can a maximum Hope Credit of $1,500. be taken AND a full exclusion for 529 Distribution on tp's return? All other qualifications and limits are met.

[Bees Knees]

yes

Step One: In order for the Scholarship to be treated as tax-free, it has to come out of tuition & fees. Room & board do not qualify. Therefore, you start with the $7,610 total tuition & fees, minus the tax free scholarship of $1,315, leaving you with $6,295 remaining for tuition & fees.

Step Two: Section 529 plans can be distributed tax free if used for qualified expenses, which includes tuition, fees, and room & board. So your $7,500 distribution can first be used to cover room & board ($6,690) leaving you with $810 used for tuition & fees. $6,295 remaining tuition & fees from step one minus $810 equals $5,485.

Step Three: Remaining tuition & fees of $5,485 can be paid with other cash. The first $1,000 for 2005 you get a 100% Hope credit, plus the next $1,000 you get a 50% credit. $1,000 + $500 = $1,500 total Hope credit for 2005.

Answer: Yes, your 529 plan distribution is tax free, plus you get your full $1,500 Hope credit, plus the scholarship money is tax free.