Hello, my apologies if this has been brought up before, but was unable to find anything. If there is a thread, please feel free to point me in the right direction.
My accountant just finished my taxes and said that my AOTC would have been higher but the tax-free earnings from my college plans reduced the amount. I am in in the process of getting more information from her, but was wondering if someone has any insight into this? Thanks!
Just ask your accountant to recalculate what your tax liability would be if you pay taxes on the “tax-free” earnings from the college account. You do have the option of doing that, and the increased AOTC may be enough to offset the additional tax liability.
See pg. 60 of IRS Pub. 970:
P. 60 does not answer the question, MiddKid86. The accountant has already calculated the taxable portion of the distribution. The point is that the OP can elect to pay taxes on a portion of the otherwise “tax-free” portion . . . and, if she does, then that will increase the AOTC to which she’s entitled.
BTW, don’t quite understand who’s who here. Unless the OP is an independent student, it’s the student who’d be getting a distribution from his or her college plan (and paying taxes on that distribution) and the parent who’d be getting the AOTC.
If your income is between $80k-$90k (single) or $160k-$180k (married), the AOTC is reduced, so if some interest reported increases your salary from $79k to $81k, you’ll have a slight reduction. Are you sure it was the 529 interest? Other interest? A 529 withdrawal that wasn’t for qualified expenses?
The problem here had nothing to do with the OP’s income level (or reported interest income). It was simply the proscription against “double-dipping” - she can’t claim the AOTC for qualified expenses that were paid using tax-free 529 distributions. But if she elects to pay tax on the 529 distribution, the problem is solved.
What if she’s paying it with a return of the original 529 contribution and not the tax free income earned on the 529 funds?
All 529 distributions are made on a pro-rata basis from both contributions and earnings. The only way to take a distribution from contributions only is if you don’t have any earnings.
Hi everyone,
Thank you all for your contribution to the question. Double-dipping did not occur as I am aware that 529 monies used can not be counted toward the credit. Here was the reply my accountant came back with when I questioned her about it:
All earnings from the IL college savings programs are tax-free when used to pay tuition, therefore, the tax-free earnings are also applied to the tuition before the credit is calculated.
I’m a little confused at her answer, but I might have another issue with how she calculated the credit because I think she might be interpreting the 1098 form incorrectly. I’ve asked for a copy of my return before we finalize it just so I can take a look at her numbers.
I used to not mind doing taxes other than the time it took to do them, but this whole AOTC/529/T1098 stuff just adds a whole 'nother layer of difficulty to the process!
Right, and that’s why I referenced pg. 60 of pub 970, which explains how the AOTC and 529 plans interact.
I hope your accountant also understands that 529 money can also be used tax-free for room, board, required fees and books and other required supplies.
Yes, I know that, but that is where she might be a little confused. The 1098T is a little deceiving as well as my son’s school fills in line 1 which is what is payments received and not what was actually billed, which was higher and doesn’t reflect the winter semester that I paid for since they consider that 2015. I thought I had sent her the full COA amounts on a separate sheet, but she might not have understood them. A conversation is definitely in order.
.When a school uses box 2, billed amounts, you still can only use what you paid in the tax year based on bills and the online account.
When a school uses box 1, paid amounts, if you mailed or charged a payment in late December but it wasn’t credited to the account until early January, you can still use the amount paid in the earlier year.
So for the winter semester, when did you actually pay for it is what matters. Dropping the check in the mail or making the charge?
Full COA isn’t really relevant as taxes are by tax year, not school year.
The payment was made and credited in December for the winter semester - so it sounds like I can count that for this year even if it isn’t included in box 1? Just have to make sure I remember to take it out when I’m doing next year’s taxes.
Sorry, I used the term COA incorrectly - I really meant the costs for each semester since I know that taxes are by year. I printed out a detailed list of all costs and payments associated with spring, fall 2014 and winterm 2015 and gave that to her, it’s possible she wasn’t sure it was something for her to really look at.
IMHO, the 1098 T is not that helpful, as it is only a reflection of what the school charges for tuition. It does not include any fees (which are also deductible) nor expenses for required textbooks (which can be substantial).
After speaking with the college’s 1098-T service provider, they basically told us they get more questions about this than anything else, and while they cannot give tax advice, they were able to confirm that fees and expenses are also eligible.
Does anyone have any experience with using tax-exempt bonds for tuition/fees/books, and then a 529 for room/board?
They certainly don’t make this easy.
3 puppies, my kid’s 1098Ts always include qualified mandatory fees. If a fee isn’t included it’s likely not a qualified fee. But no books.
@ILMom13579, if the winter payment was credited in 2014 it certainly should be included in box 1. I would double check the box 1 number against bills and the online account. If it really doesn’t include that, I would inquire with the school about it. But if you can document from bills and cancelled checks or other record sof payment, yes you can include it for 2014 even though it’s not on the 1098T.
3puppies, you should start your own thread about the tax-exempt bonds and 529 funds. I can probably help you there.
OK, apparently there was some vocabulary confusion b/w acct. and myself so once I really figured out what she was saying and then saw the actual return, she did it correctly so we are all set. Thanks everyone for your help!