Interpreting pub 970- education credits

Usually no, as you get the benefit of a tax-free distribution if it was used for qualified expenses.

However, I recall recommending that a client take the credit and declare the distribution as income but it wasn't a straightforward process--the original contributions and earnings are used to calculate the taxable amount--I'm sure it's in Pub 970.

The Pub is quite clear. You can't obtain a tax benefit unless you paid the qualified educational expenses with funds other than those that are tax-free. If the 529 distribution is a qualified distribution and therefore tax-fee, then you can not use any of the expenses paid with the distribution for another benefit.

This is my interpretation.

Others are telling me that the contribution was taxed, therefore the

529 withdraw is partly a contribution, and that portion of the distribution qualifies for the credits.

I cannot find a definitive answer.

Appreciate both responses thus far, thx.

The example (Sarah Clarke) on page 50 of Pub 970 shows where the parents claim a Hope Credit of $2200, creating additional income of $714 for their dependent daughter. It is apparent that they are better off taking the credit--the catch is having an AGI low enough to qualify for the Hope Credit (the Lifetime Learning Credit would not be as advantageous).

Many people just take the tax-free distribution when they should be looking at the possibility of claiming a credit and having their child declare the income.

So can you pay say 100% minus $1000 dollars from the QTP, and $1000 from your pocket, and claim the credit? The QTP and cash are used to pay different expenses -- namely different portions of the tuition. Or maybe I'm pushing the envelope too far here. Or maybe you can use the QTP to pay 100% of the tuition, and your hard-earned cash to pay for student fees and books required as a condition of enrollment, and then claim the credit for the fees and books.

You're not pushing the envelope. The way the law & rulings were written you start with the total amount of qualified expenses. You subtract the amount paid with tax-free scholarships, grants, etc. You subtract the amount of qualified expenses used to obtain the credit. The result is the adjusted expenses. Using the amount of the QTP distribution that represented earnings, you could then compute the taxable part of the QTP distribution. Pub 970 has an example of this. Don't overlook the fact that qualified expenses for a QTP are defined differently then qualified expenses for the credit. QTPs include reasonable room and board.