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College Credit - 529 - Clarification

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    College Credit - 529 - Clarification

    Client contributes $9,500 to an Indiana College Choice 529 Plan during 2016. Client also ended up taking a distribution of the full amount and used it for qualified college tuition (doctoral student). Since the funds were withdrawn from the 529 plan to cover the tuition, is the client allowed to claim the Lifetime Learning Credit? Or is the client prohibited from claiming the education credit since the funds were in a 529?

    #2
    Originally posted by Hoosier View Post
    Client contributes $9,500 to an Indiana College Choice 529 Plan during 2016. Client also ended up taking a distribution of the full amount and used it for qualified college tuition (doctoral student). Since the funds were withdrawn from the 529 plan to cover the tuition, is the client allowed to claim the Lifetime Learning Credit? Or is the client prohibited from claiming the education credit since the funds were in a 529?
    There is no such restriction - you must first use the Education Credit before using the QTP or 529 plan.

    We usually enter everything that is deductible on the 8863 first. Then re-enter it on the 529 plus other qualified expenses (housing, computer etc), less the 8863 claimed expenses (4,000 for AOC or 10,000 of LLC). Your software will only allow the max 8863 credit and then the balance goes to the 529 plan. If there is more 529 plan distributions than qualified expenses, there will be taxable income on line 21. Beginning this year, you can reverse the excess funds to avoid unnecessary tax.

    Mike

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