Australians using QTP funds for Aussie college

[Margaret CPA in OH]

Australian clients have 2 kids in college now and are using 529 funds from plans set up years ago when living in Ohio.  The Aussie schools don't qualify for ed credits but it seems the tax should only be on the earnings.  When contributions were made, they were deductible in Ohio but not federal.  When looking to enter in Other Income, it seems to want the total of distributions and earnings probably expecting offset from education credits.  But that doesn't seem right to include the initial contributions as taxable income.  The instructions state that "(d)istributions from these accounts may be taxable if (a) in the case of distributions from a QTP, they are more than the qualified higher education expenses... my emphasis.

So all this nondeductible money from the past is now taxable?  What am I missing?

[Terry D EA]

Margaret, the 529 earnings are only tax free if withdrawn for educational purposes. The remaining basis in a 529 plan should have come from post tax dollars and I can't see why those distributions would be taxable. Maybe because the Aussie schools aren't recognized by the IRS is the reason for the earnings to be taxable. That taxability of the earnings is pretty straight forward in the regs.

[Pacun]

If I am not mistaken, qualified higher education in the context of 529 means, bachelors degrees, and not technical schools. So as long as the dependent is going for a bachelors, I believe it should be OK and the money shouldn't be taxable.

[Margaret CPA in OH]

The Aussie schools have some sort of code (I saw the list online) that does qualify for student aid, I found out from the parents, so kids would be eligible for ed credits.  What they don't have is an EIN and they don't produce Form 1098-T, a US form.  So I have asked for a breakdown of expenditures to see what qualifies and paper file amended returns with explanation.  This situation does not easily fit into the allowed boxes and forms.  But I think they are 'credit worthy.'