Scholarships and 529 Withdrawals

Paying for College
1

I am trying to understand how much I can withdraw from my daughter’s 529 plan due to scholarships. During the past four years the numbers are:

Total scholarships (scholarships, Pell grants, SEOG, Institutional aid): 60K
QEE (tuittion, QEE allowable fees, books) : 40K (tuition, fees, books)
Taxable amount : 20K
Additional amount declared taxable and used for AOTC : 12K
Total taxable amount : 32K

So my questions are:

  1. Has anybody had issues taking scholaaship based withdrawals for past years? Publication 970 is clear that withdrawals for QEE must take place in the same year as the expense (missed that deadline by 45 minutes). However there doesn’t seem to be a time limit for scholarships.

  2. What can I actually withdraw for scholarships that paid for tuition/fees/required expenses? In my case, I am guessing taxfree portion of the scholarships (40K) - Amount used for AOTC (12K, so no double dipping)=28K. Thoughts? I realize that I will have to pay taxes on the earnings but I am trying to avoid the 10% penality.

2

Why $12000? The most QEE for AOTC is $4000.

But to be on the safe side: same year.

Most tax software would compare the 529 distribution to the scholarship automatically.

3

The 12K represents the amount of scholarships that was declared taxabe to allow taking the AOC for the last four years.

I know it would be safer to claim the scholarship in the byear it was awarded but that would cause me to lose the automatic zero EFC due to having to file a 1040 return to declare the earnings income.

4

Wait, so you declared $12k of scholarships all in one year because you previously took AOTC on scholarship-paid costs in earlier years?

5

In order to avoid the 10% additional tax on the earnings portion of a non-qualified 529 distribution, there are no IRS rules or regulations that I am aware of that require the 529 distributions to be taken in the same year that corresponding scholarships are received by the student.

6

Thanks.

The 12K represents the total amount over 4 years. In each of the 4 years, I made the part of the scholarship for that year taxable to allow for the AOTC to be claimed. The amount varied from 2000-4000 depending on the year.

As I mentioned, I did not take any withdrawals for the scholarship to date. I am assuming (until I talk to an tax accountant) that I can only take a withdrawal for the part of the scholarship that was not taxable. Correct?

7

If you are asking about a 529 non-qualified distribution not being subject to the 10% additional tax, yes, that is correct.