AOC and 529 coordination
In 2014, I had:
Room and board: 11,000
529 distribution: 11,000
I am a dependent on my parent's return. In order for my parents to claim of the AOC, I want to claim an additional 2,000 of my scholarship as taxable (see Pub 970 below). This allows my parents to list 2,000 of tuition/fees/books as expenses to qualify for the AOC. In this case, my taxable scholarship amount would be: 8,000 (14,000-6000 tuition/fees after deducting 2,000 for the AOC).
What I am not clear on is what my Adjusted QEE for the 529 plan is. From Pub 970 (see below) if appears to be:
AQEE: 19,000 QEE (Tuition/fees/room/board)-6,000 (8,000 tax-free scholarship-2,000 that was declared as income) - 2,000 (QEE use for AOC) =11,000
Based on this the 529 distribution is tax free.
Is this analysis correct?
From 2013 IRS Pub 970:
Coordination with Pell grants and other scholar-ships. In some cases, you may be able to reduce your tax liability by including scholarships in income. If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in in-come. The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses.
Example 1. Joan paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in or-der to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 stu-dent loan. The terms of the scholarship state that it can be used to pay any of Joan's college expenses.
University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her stu-dent loan and her savings. Joan does not report any por-tion of the scholarship as income on her tax return.
In figuring the amount of either education credit (Ameri-can opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan pro-ceeds. Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship).
Example 2. The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Joan is treated as having paid $3,000 in qualified education expenses.
Coordination With American Opportunity and Lifetime Learning Credits
An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.