529 PLAN

[TAXMAN]

My mind is not working as it should. I have a 1099Q gross dist $5100 in box 1. Earnings in Box 2 $2100. and box 3 basis $3000. 1098T box 1 says $4100. Nothing in box 5. So the way I figure it the earnings is tax free. Leaving 2000 for possible ed credits. or do I need to make some sort of allocation? If you can please help. Thanks

[Possi]

I always start with the actual account detail from the school. I check it to see how much was paid by the taxpayer, how much with student loans, and how much was free. 

Use this to either equal (or justify) or exceed the 1098T box 1. I have been called on the mat too many times NOT to have that documentation in my file. 

To justify the 1099Q distribution, you can add the other deductible education expenses (which are allowed for that particular distribution) so that none of the earnings become taxable. 

There are much smarter pros here that will chime in with many more details, but I just thought I'd get it started. 

[Sara EA]

Was the student at least half time?  First make sure the clients are eligible for the AOC.  If so, you want to use the first $4k in expenses for the credit because it is much more valuable.  To the remaining $100 of qualified education expenses, add books, room and board, possibly a computer for school.  Let's say that total is $2550, or half the distribution,  used for qualified ed expenses not counting those used for the AOC.  That makes half of the earnings taxable.  Your software should handle this.  Just be sure not to count the first $4k in tuition used for the AOC as qualified expenses for the 529 distribution.