FAQ 2: Can I use 529 plan funds to pay my child's college expenses in the same year I claim an education tax credit?
Yes. You can use 529 plan funds to pay for your child's college expenses in the same year you claim an education tax credit such as the American Opportunity credit or Lifetime Learning credit. But there's a caveat. You can't use the same college expenses to qualify for the federal tax-free 529 withdrawal and the tax credit; the expenses you use to qualify for each must be different. Otherwise your 529 withdrawal will not be free from federal income tax.
For purposes of your 529 plan, your qualified education expenses are first reduced by expenses used to compute your American Opportunity credit or Lifetime Learning credit. The remaining expenses may be paid with the funds you withdraw from the 529 plan (and you won't pay any federal income taxes on those funds). You will pay federal income tax (and, in most cases, a penalty and maybe some state income taxes) on any part of your 529 plan withdrawal that remains after paying these expenses.
Another option is to waive the American Opportunity credit or Lifetime Learning credit. This waiver may make sense if the value of the education credit is less than the value of federal income tax-free (and penalty-free) withdrawals from your 529 account.
For more information, see IRS Publication 970, Tax Benefits of Education.
Note: Before investing in a 529 plan, please consider that there are investment objectives, risks, charges, and expenses. Contact us for more information on financial planning.
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.