<p>Having a disagreement here and need clarification. 1098T shows qualified tuition of about $12,000 with a $3000 scholarship. 1099Q shows a distribution of $15,000 with earning of about $5. One person says that the entire $9,000 of tuition (qualifed less scholarship) can be used for the tuition credit on the parent's return, while on the student's, only the $5 will be taxable. Another person says there is no tuition credit available since the $15,000 exceed qualified tuition.</p>
<p>It depends. Our 529 plans allow distributions to be paid towards room and board up to the amount the university specified cost that they use towards full board scholarships. For example, if the college states room and board is 15K, your 529 distribution can go towards those expenses and the entire 9K can go towards the tuition credit. However, you only need 4K to get the entire AO tax credit. </p>
<p>Also, don’t forget books which, though typically not on the 1098T, are qualified expenses. Also, make sure the 1099T is for the 2010 year, not fall 2010 plus spring 2011. I had to modify the reporting on my taxes as the 1098T I was given was for 2010/11.</p>
<p>You can choose to make the 529 distribution taxable and claim the tax credit for the tuition. IRS 970 (the publication for education tax benefits) specifically adresses this n pages 55 and 57. </p>
<p>Yes. But the taxable portion of the distribution is only $5. Their preparer claims that since the rest of the $15,000 is money they put in, they can get a tuition credit for the entire amount. </p>
<p>The preparer is correct. If you pay tax on the distribution (all $5 of it) they can claim the AOC credit. You don’t even have to pay the penalty (see post 3 above). IRS 970, which is the relevant IRS publication, says this is allowed and even shows an example of how to do it.</p>