I have some questions about how scholarships impact distributions from an 529 plan.
Based on IRS Pub 970, it looks like I can take a distribution equal the amount of QEE used for the AOC without occurring the 10% penalty. However, what if the QEE was paid by part of the scholarship that was made taxable? Does it have to be taken in the year she received it?
For example:
Scholarship: 14,000
QEE : 10,000
AOC: 4,000
Taxable scholarship: 4,000 (14k-10k) +4,000 (part of scholarship declared on taxes to allow AOC)= 8000
Tax-free scholarship: 14,000-8,000=6,000
So my understanding is that I can take a 529 distribution of 6000 without the 10% earning penalty do to the scholarship. But can I take an additional 4000?
Why is your tax-free scholarship only $6k? If you had $14k in expenses that can be paid with a tax-free scholarship (let’s say tuition), and you use $4k of that expense to claim the AOC, the other $10k of the scholarship will be tax-free.
In the example, my QEE was 10 K. Scholarship exceed QEE by 4K and 4K of the 10K tax-free scholarship was declared taxable to allow AOC. 6K remained tax-free.
So I believe I can withdraw 6000 from the 529 (paying taxes on earnings but no penalty) but what abut the 4K applied to the AOC.
I saw that in Pub 970 but was unsure if it applied since I declare 4000 of the tax-free scholarship as taxable in order to claim the AOC.
Also it seems that the scholarship exemption can be taken for years past (grey area) but what about the AOC exemption? Does it have to be taken in the same year as the AOC credit?
For reason too convoluted to get into, I would like to wait until future years to do this.