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Interesting 2014 American Opportunity Tax Credit Eligibility Question

We have tuition credits in the Private College 529 Plan which we purchased back in 2010 for our daughters final year of college. We already do not claim her because our exemptions are phased out. She has only used 2 years of AOTC so far.

Her school runs on quarters, and the tuition for her final quarter covering Apr-Jun 2014 is due in March 2014. We already paid for the Winter Quarter (Jan 2014-Mar 2014) in Dec 2013 through the 529 plan.

The credits have appreciated almost 20% since we purchased them because of tuition inflation but only if they are used for that purpose. Otherwise, for other purposes, they have appreciated roughly 7%.

The remaining balance, say $15K, is identical to the tuition and fees, and to capture the full amount we must request that the Private College 529 Plan send the distribution check directly to the school. If we do that, her 1098T will match up exactly with her 1099Q.

However, she lives in an apartment and is paying about $7K in 2014 for rent and food for Jan-Jun out of pocket, which is within the school's reported financial aid budget for room and board (which as I understand is the test for whether it qualifies as an educational expense for tax-free 529 distributions).

Since her total 2014 qualifying expenses are 15K + 7K"K, and her 529 distributions are 15K, it would seem that she still qualifies for AOTC.

However, since the 529 pays the school's bursar directly for tuition and fees, and since the only bursar expense are those tuition and fees, does that negate the AOTC?

Would a better strategy be to only pay $11K from the 529 to the school, pay the last $4K of tuition out of pocket to qualify for AOTC, and then withdraw the balance of the 529 plan to reimburse my daughter for rent, giving up about $500 of appreciation on the 529.

She has already landed a job and will make approximately $40K in 2014 so she will likely qualify for the whole AOTC of $2500.

Really the question boils down to whether AOTC eligibility involves just adding things up, or whether it matters where the 529 check actually goes and what it's actually used for.

Reply to
jms2l
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The AOTC is computed first. $4K of tuition can be used for the AOTC. That $4K can no longer be used for computing the tax-free amount of the

529 distribution.
Reply to
Alan

But can off-campus room and board count in the computation of the tax-free amount of the 529 distribution if the distribution was paid directly to the school, and the school only billed for tuition.

Reply to
jms2l

Yes. You need to read IRS Pub 970.

Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. a. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. b. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Reply to
Alan

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