It seems to me that some taxpayers might find themselves in a particular position to use the Hope Credit to escape from looming taxes and penalties for 529 withdrawals.
If you found yourself with excess funds in a 529 account (say the older child didn't attend college as planned) and your younger child is using the funds currently for college. However, you will have ample excess funds in the 529, and will be ultimately required to withdraw the funds, pay income tax on the earnings and pay a 10% additional tax.
Why doesn't the taxpayer elect NOT to claim the child as an exemption, withdraw 100% of the excess funds from the 529 in the student's name, and use the Hope Credit to offset all of the tax on the 529 withdrawal? It sure looks to me like the income tax - and the additional 10% tax - on the 529 can simply be offset by the Hope Credit. (This assumes that the child pays the income tax on the 529 withdrawal).
Is this a "get out of jail free" card for some folks? I realize not many people fall into this particular situation, but it sure seems to work from what I can tell.
Am I missing anything? (My children are just starting college so this doesn't apply to me, but this new Hope Credit and the 529 account have me thinking about the best uses of both.....)
Best wishes.