Thanks Alan for answering my last question. I see that any gain on any 529 withdrawal is income to my daughter, not me.
What about if she is claimed as a dependent by me?
Also, I plan to use either the American Opportunity Credit or Lifetime Learning Credit. If I read Pub 970 correctly, I have to add this gain (in proportion to the ratio of AQEE to distribution) to my income before taking the credit. Correct?
But the wording of examples indicates that the student realizes the gain. I'm confused if someone can please clarify.
Here's the best part of the tax benefit. You take the qualified expenses and adjust them for any tax free educational assistance. You use the adjusted QEE to claim the AOTC for your dependent child. Then you take the same adjusted QEE and subtract the amount of expense that was used to calculate the AOTC to arrive at the adjusted QEE for the QTP calculation. The QTP calculation takes the earnings times the AQEE divided by the QTP distribution and subtracts the result from the QTP earnings to arrive at the taxable amount that goes on Line 21 of the dependent child's tax return.
Here's an example:
$20K distribution from QTP ($18K rtn of capital, $2K earnings). Tuition, fees, books and supplies required to attend = $18K. Scholarships = $2K.
Parent's Return for AOTC: QEE = $18K. Adjusted QEE = $16K (18 - 2). AOTC limit is $4K of expense that generates a $2500 credit ($1000 refundable, $1500 nonrefundable).
Child's Return: AQEE from AOTC calculation = $16K. AQEE for QTP calculation = $12K (16 - 4 used for AOTC). $12K / $20K = .60 .60 * $2K = $1200 nontaxable $2000 - 1200 = $800 taxable income on Line 21 of child's 1040.
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