1099Q Distribution and American Opportunity Credit Strategy

[15Gornzz51]

A taxpayer has a 1099Q distribution and has education expenses equal the 1099Q distribution.
Is it an acceptable strategy to declare $4000 of the distribution as taxable income so that the taxpayer can use $4000 for the $2500 American Opportunity Credit for a dependent’s college tuition fees if this results in a better result on the tax return?

Then the taxable portion of the $4000 would be added as taxable income on Schedule 1 Line 8 Other income, and the 10% penalty would be added to Form 5329 line 5.

[rbynaker]

Yes, that's generally the best approach.

The income is taxable to the recipient (that may be the account owner or the beneficiary depending on how the distribution was structured).

There is no penalty to the extent the distribution was used to calculate education credits.

Rick

[kathyc2]

Don't forget that the 529 disbursement can also be used for room and board.