529 Plan $ vs. Federal ATOC/Lifetime learning tax writeoff/credit.

Paying for College
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Married couple with child starting college. Enough funds in 529 to pay ‘our’ share of a few semesters. After student’s federal loans and merit/ need aid, net bill for fall semester is about $5500. Household income approximately 55-85K after itemized deductions)

Question (no call back from tax preparer): We paid $5500 from our college savings account. What is the maximum amount of cash you can claim for 1 dependent in our general bracket for the ATOc? lifetime learning credit? vs. taking funds from the 529 plan, per year? We took $1200 out of the 529 plan to pay for computer. Would help to know the optimal blend of taking from savings vs. taking from 529 plan for itemizing on our taxes.

Thanks.

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To fully and accurately answer this question, you need to disclose your COA broken down by categories (tuition, fees, R&B, books and other required supplies, etc.) and also the sources and amount of expected education funding. Also need to know AGI, which is calculated before itemized deductions are figured in.

But I’ll give it a rough stab:

The “optimum blend” is paying $4k out of pocket (includes loans) each tax year in AOTC qualified expenses to get the full tax credit of $2.5k, and paying remaining 529 qualified expenses with 529 account money.

How much is the student taking in federal loans?

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Thank you Belknap. Student will be taking maximum student loans over 4 years.

Can you give us more info based on following:
AGI for 2016 is going to be about 80-90K
COA:
costs Per Semester

Room 3500

Board 2600

Mandatory fees 500
Tuition 19000

TOTAL BILLED by COLLEGE 25600
Other Misc costs (travel books) 1000

(for 1 semester)

University Aid $17,250

Subsidized Direct Loan 1732

Unsubsidized Direct Loan 990
State-aid and work study 1000

Total aid works out to be (of course work study is to be earned by student) : $21,000
Bills so far: 5000 out of bank+/- paid to University for 1st semester
1000 out of 529 for computer (bought from Computer Vendor)

Student’s income will be probably under $4000 for this year. We can move savings stash into 529 or out of 529 into savings stash as we plan for 2017.

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You’ll have five tax years (2016-2020) over the course of four academic years (2016-2017 through 2019-2020) to take advantage of tax credits. Normally, the best thing to do is to use the AOTC first for four tax years because it gives the biggest bang for the buck (maxes out at $2,500 credit per year), and then use the LLC for the fifth tax year (20% credit on up to $10k in qualified expenses).

For the first semester (Fall 2016), you’ll want to find $4k in AOTC qualified expenses (tuition, required fees, and required course materials) that haven’t already been covered with tax-advantaged money, which includes tax-free grants. Looking at the numbers you have provided, and estimating that required course materials will be $500, this number is $2,750 ($19,000 tuition + $500 fees + $500 books - $17,250 university aid). This means that in order to get the full $4,000 AOTC for the first semester, you will need to declare a portion of the university aid ($1,250) as taxable income to the student and designate it for room and board. You’ll have to calculate the tax scenarios different ways to see if it makes sense to do this. Remember, the AOTC is dollar-for-dollar for the first $2,000 in qualified expenses, and $.25 on the dollar for the next $2,000 in qualified expenses.

I’m not sure why the student is taking out loans if you have 529 money to use towards remaining expenses that are 529 qualified (room and board, in this case). Distributions from 529 accounts must be taken in the same calendar year in which the expenses that they are covering were paid. This means that you can’t pay for room and board with loans in 2016 and then take a 529 distribution in 2017 to pay those loans off. If the student has available 529 money, why take out loans?

It will be easier for you to find enough AOTC qualified expenses, after applying university aid, in tax years that cover two academic semesters. For example, using the figures you have provided: $38,000 tuition + $1,000 fees + $1,000 books - $34,500 university aid = $5,500. Pay $4,000 of this out-of-pocket and you will be eligible for the full AOTC, and the remaining $1,500, plus all of the room and board ($12,200), can be paid for with 529 money.

You can’t just randomly move money out of a 529, without matching it to qualified expenses paid in the same calendar year, without incurring taxes and likely a 10% penalty on the earnings portion of the distribution.

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If there is enough money in the 529, the student could also just take out the subsidized loans.

The work study money will be earned during the semester as a paycheck, it’s not available up front.

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This is not my thread but thank you @BelknapPoint for the very thorough explanation. I am in a similar situation as the OP and while I had to read your explanation twice I got it and appreciate it.

Very helpful.

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Answers to specific questions:

A maximum of $4,000 in qualified expenses for each qualifying dependent to garner the maximum credit amount of $2,500, for up to four tax years.

A maximum of $10,000 in qualified expenses for each qualifying dependent to garner the maximum credit amount of $2,000, for an unlimited number of years.

Tax-free and without penalty, you can withdraw, in the same calendar year, up to the amount of Adjusted Qualified Education Expenses that the beneficiary has. You can drain the account at any time, but you will have to pay taxes and likely the 10% penalty on the earnings portion of any amount that exceeds the beneficiary’s AQEE for that year.

Details here, straight from the IRS:

https://www.irs.gov/pub/irs-pdf/p970.pdf

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You may want to familiarize yourself with the following:

https://www.irs.gov/pub/irs-pdf/p970.pdf

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Thank you @BelknapPoint. The description of the limits, pros and cons and factors to remember are what we need to figure out what to do. Thank you for pointing out about moving money out of the 529- I guess what I meant to indicate was that if there was an advantage to moving some of our (fixed stack of savings in bank) into (Tax advantaged 529 plan) that we could do so.

Books came in right at $500 -600 or so.

Saw the computer (needed for general college use, not technically ‘required’ for college) could be funded by 529 and so withdrew $1k +/- from 529 to pay for it (receipt carefully filed).

(Student only/ federal only ) loans are being taken as 4 year cost of college > amount available from parents savings stash/ 529 to pay for them. If financial conditions permit we will increase parent share to reduce loan amounts but conditions are not clear as one might hope.