First time poster, been lurking for 3-4 weeks as my only daughter is a high school senior, accepted at her 4 safeties/matches, waiting on 9 more schools, mostly all reaches. I’ve been doing some light reading, IRS Pub 970, trying to sort through all the acronyms, AOTC, QEE, LLC, QTP. How about one more - WT? Anyway, I am the noncustodial parent, my daughter lives with her mother. We have a 529 plan but it’s in my name with my D as beneficiary. I am pretty sure of all the tax issues, distribution will go on FAFSA next year, etc; my main question is how to designate any 529 monies to go towards room and board? I know room and board is not a QEE for the AOTC. Her mother will be taking that credit using a PLUS loan, as you can take the credit with borrowed funds. Do you have to separate payments to the school and designate loan proceeds for tuition and fees and 529 funds for room and board? Confused. Daughter also has merit scholarships ranging from $8000-$20000 at the four schools accepted to, only 1 financial aid award so far though. Rather long winded, thanks for any info.
There’s nothing formal to do to designate the 529 funds for room and board. You just need enough QEE(which includes R&B for this) to cover the distribution amount plus enough AOTC QEE for your ex to take the AOTC. And read the 970 sections on not using the same QEE for multiple tax benefits. Just keep copies of bills and her online account statement and records of payments and the distributions. Be sure to take the 529 distributions in the same tax year as the 529 QEE is paid.
I don’t know what percentage of QEE those possible merit scholarships may be but look at 970 chapter 1 about taxable scholarships and having to reduce AOTC QEE and 529 QEE by the amount of tax free scholarships in chapters 2 and 8…
Here is a good link about it and how to take the distributions:
http://www.savingforcollege.com/articles/the-best-way-to-withdraw-529-funds
Just keep track of the total expenses. Note that the QEE for 529 and QEE for tax credit are different.