[aaronmo]

For those of you who don’t do any 1040s with middle class folks…this will be useless.

Anyway…had a guy who had more 1099-Q distributions from 529 plans than he had expenses, so SOME of the distribution was taxable (though not in the penalty)…

The cool trick part is…if under the phase outs AFTER the distribution…you can pull the 4000 in expenses away from the 1099-Q offset and put it towards the AOTC credit. It goes past the now taxable $4000 in Q-distributions.

[Lara]

Yep. Same trick with the Parent's AOTC credit when the child has scholarship. Pull some of the scholarship out to maximize the parent's credit and let the child claim the scholarship as income. Most of the time the child exemption will cover it, so no taxes due for the child.

[aaronmo]

That's a new one to me Lara (filing away).

[Recked]

I had one of those this year, but I didn't do the kids tax return, and the price point for the client wasn't high enough to take the gamble on moving the scholarships over to the kids return.
No idea if the kid had any W2 wages or not, and did not want to get involved.

I was just counting the ways I could get caught with my hand in the cookie jar on that one so I shy'ed away from it.
Client was already getting money back with a somewhat questionable 1099 “employment” that should have been a W2.

[aaronmo]

Yeah…I FIRMLY believe in the 100 mile view.

[Lara]

Guys pulling out scholarship and claiming them as income is within IRS guidance. See IRS publication 970. Start with the “Tip” under page 14. And it’s further explained in page 15 – coordination with Pell Grants and Scholarships.

Publication 970

[aaronmo]

I don't think he was questioning the legitimacy…I think he was taking the 100 mile view of:

Is this worth it?
Does this increase risk/exposure overall?

[Recked]

Indeed. If you pull scholarships to make them income to the kid, you would need to at least look at the kids information/tax return to confirm its not taxable, or that if the kid has a W2, they file a return showing the income from the scholarships. This is a $200 tax return I do as a favor to the bookkeeper of a business client. I do not do the kids tax return (it's handled by the father/ex-husband). I chose to avoid it so as not to draw any unnecessary attention to the return I prepared. Sure I could back up my position, but are there other things that might come out in the wash that I don't know about?

[Author]

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