<p>Does anyone know if we have to spend down the 529 before we can get the $2500 tax credit? (Hope my questions makes sense) It seems if we were to claim the tax credit, we'd be "double dipping" if we're already using the 529 to pay for room and board.</p>
<p>No. You don’t have to spend down the 529 account.</p>
<p>For a start, Room and board is *not *a qualifying expense for the tax credit, but is for 529 account expenditure - so no double dipping there if that is what you are using 529 funds for. It is only “double dipping” if you use the *same *qualifying expense to claim more than one tax benefit. So you can not use tax free 529 account money to pay for tuition and fees and then use the same tuition and fees expense for a tax credit. </p>
<p>Also, if you use 529 account money to pay for tuition and fees, it is possible to claim a tax credit as long as you pay taxes on any 529 account money that is income. You do not have to pay the penalty if this is the reason you are paying taxes on the529 account money. IRS 970 has the rules and regs (assuming it is the same as last year, have not checked)</p>
<p>It’s confusing, though, but I am thinking that our out of pocket expenses are just for the meal plan rather than tuition, so it sounds like no matter what, we won’t qualify for the tax credit. My son has a large need-based grant from his school that appears to cover tuition plus a little more. On top of that, he has a scholarship that covered the loan and work study portion of his f. aid package (Which is four years). For this year, I expect to spend only $2,700 out of pocket from our 529 account to cover his meal plan.</p>
<p>I can safely assume that we can’t ever get the tax credit if his need-based grant will always cover the cost of tuition, correct?</p>
<p>Well you will have to work out the numbers and see if it is to your advantage to have your son claim some of that scholarship and grant money that went toward tuition as taxable income. Since he is already going to have to claim the portion that exceeds tuition and books as taxable income, it may be advantageous to increase the amount he claims so that you may claim the increased amount toward the AOC. He will have a certain amount of income that is not subject to federal tax (I can’t remember the specific amount but it was around $6500). When you calculate, keep in mind that the scholarship/grant money declared as income on his federal return are subject to state tax and the state tax will affect the net value of the tax credit gained by having him claim some of the scholarship/grant money as income.</p>
<p>Oh boy, I forgot about scholarships being considered as income (makes sense but I forgot). So here are some numbers:</p>
<p>Tuition is about 42K. The grant from school is 42.5K</p>
<p>Room and Board is about 9.5K. The yearly scholarship is 6K.</p>
<p>Our out of pocket is about 3K for the 2012-2013 school year.</p>
<p>My son’s other income was about $1800.</p>
<p>How will that work on his taxes? Is his income now $7800? So he’ll owe taxes on the 6K? He already paid taxes on his other income.</p>
<p>He did not spend any money on textbooks first semester. He borrowed and shared books. I think he’ll have to spend money this semester but that will go on next year’s taxes, correct? (He’s a freshman if I haven’t been clear)</p>
<p>How does this affect our taxes?</p>
<p>So it looks like he has $6500 of scholarship/grant income he will have to claim in addition to his $1800 earned income. His standard deduction when he files his 1040 will be $5800 as a single person who is claimed as a dependent on your return. So he will have about $2500 of taxable income on his federal return. His tax liability will only be a couple hundred dollars. State tax liability will depend upon the amount of his state standard deduction and tax rate.</p>
<p>taxable scholarships/grants = scholarships/grants - tuition - mandatory fees - required books and supplies. Is it required by the terms of the grant that it be used for tuition? Is it required by the terms of the scholarship that it be used for room and board or are you just allocating it that way? No books at all? No iclicker or chemistry goggles or whatever?</p>
<p>It looks like around 6.5k + 1800 = 8300 income. Since he’s over the 5950 std deduction for dependents he’ll have to file a return and pay some tax. You can’t use amounts covered by scholarships for AOC. If the terms don’t prohibit you can play around with putting more of the scholarships/grants toward R&B, him paying more tax and you taking the AOC for those costs. However, if you already withdrew from the 529 in 2012 to cover the out of pocket, then you can’t use those costs anyway.</p>
<p>How did he already pay taxes on his other income? Did he already file?</p>
<p>Yes, check your state requirements.</p>
<p>Well, wait a minute. If he’s a freshman all those amounts should be halved for tax year 2012.</p>
<p>For his job (he worked from Jan-July, 2012) back home, he had federal taxes ($81) taken out. That’s what I meant by he paid taxes. </p>
<p>Yes, these costs are for 1/2 year only. I took out $2500 last fall from his 529, but actually didn’t use it all because I forgot you pay for the meal plan by semester. I just took out $200 more a few days ago to use in combination with the leftover 529 money; so, in reality for the first semester, we paid only $1,353 out of our 529 account for the fall fees and will be paying around $1353 for spring fees from the account.</p>
<p>So will this all affect his taxes but not ours?</p>
<p>I have no doubt he won’t receive as much aid this year as he did last year even though my husband’s income was nearly the same as 2011 (about $1,500 more) and my son’s work income was less (by $1,300).</p>
<p>I don’t know how schools calculate f. aid, but I’m guessing we might use up all the remaining 529 for the next school year (about $3500 left). </p>
<p>Which still leaves me scratching my head regarding any tax credit. Should we just not worry about it until we’ve used up the 529 money?</p>
<p>If his income including taxable scholarships/grants + other income for 2012 is over 5950 he will have to file and if he owes taxes, then the amount he already paid will be subtracted from what he owes, or he could get a refund.</p>
<p>You do realize you have to withdraw from a 529 in the same tax year the costs were incurred? If you withdrew some this year to pay last year’s costs, understand that the amount you withdrew this year needs to be offset by this year’s costs.</p>
<p>I’m really confused about when the costs were incurred. Are you saying a full year of tuition and R&B have already been billed and paid in 2012 and only the meal plan was billed/paid by semester?</p>
<p>From what you are saying, it looks to me like you are going to have to report $1147 on your tax return since you withdrew more than the costs incurred in tax year 2012. Look into how over withdrawing is figured for taxes.</p>
<p>Oh, snap! Ugh. 
Yeah, we overdrew because I was estimating costs for the year.
So, last August, I took out $2500 but only used $1353. We are billed by semester for tuition, room, and board. So for the fall, our outstanding costs after the school’s grant and my son’s scholarship was $1353. So, yes, we have sitting in our account $1147 to be used here in a week or two to pay for the spring fees of $1353.</p>
<p>So, you’re saying because I overdrew, we’re going to have to add that to my dh’s income for 2011? Ugh. We’ve never used or needed a tax person because my husband, a blue collar hourly worker, does the taxes since they’re always pretty simple and straightforward.</p>
<p>Here’s the reference for all things federal taxes and education:</p>
<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a></p>
<p>Chapter 1 is about taxable scholarships/grants
Chapter 2 is about the AOC
Chapter 8 is about 529 plans including how to figure the taxable portion of a distribution. A quick read indicates only the earnings portion of a distribution is taxable so it should be a fraction of the $1147. The amount that represents what you contributed over the years isn’t taxable.</p>
<p>If you use tax software, it should ask for all these numbers paid/credited/distributed in 2012 and figure out how to handle it. </p>
<p>You need to check into how your state handles taxable scholarships and over withdrawals.</p>
<p>Thank-you, annoyingdad. I’ll check into Ca. laws and read the IRS bulletin.</p>
<p>The excess distribution from the 529 will be taxable, but you should not be hit with a penalty, because you had scholarships in at least the amount of the excess distribution. Even if it is taxable, only a small portion of the excess distribution will end up being taxable income (the portion that represents income earned by the 529), and and it will be taxable to the student (so at the student’s rate, which is probably lower than the parents). If I recall correctly, you will want to look at example on page 51 or 52 of publication 970.</p>