Yet another Scholarship, AOTC and 529 question

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Topic Author
kelvan80
Posts: 356
Joined: Sun Jan 12, 2014 9:06 pm

Yet another Scholarship, AOTC and 529 question

Post by kelvan80 »

Bear with me as my head is swimming with all these numbers and different scenarios.

Daughter's 1st semester was Fall 2021 and we are looking at paying in December for spring's tuition as well to get more of the AOTC for this year. We will probably be using the GI Bill for her senior year so won't be able to take AOTC that year.

QHEE for Fall 2021 including books
$5455.50

University Scholarship Fall 2021
$3500

Fall semester out of pocket $1955.50

I paid the difference by writing a personal check.

Daughter also receives a $1500 Scholarship each semester from Missouri that can be applied towards tuition, housing expenses or books. Basically if your account is settled at the university once it arrives the entire amount gets cut straight to the student in the form of a check. It arrives after a few weeks of school as they have to verify that student stayed enrolled. At this point the tuition bill has already been paid. My thinking is to apply this $1500 towards her non qualified expenses of room and board of $4911.50 and take a 529 distribution in her name for $3411.50 for Fall 2021.

As I understand it she would also then declare the $1500 on her tax return for 2021.

For December bill (spring tuition) I will have the check from 529 cut straight to the University for the $3411.50 of room and board expenses and pay the rest directly to the university from our checking account to maximize AOTC.

Am I missing anything? Any tips or ways to improve without overly complicating things?
TimeToThink
Posts: 251
Joined: Thu Oct 29, 2015 10:09 pm

Re: Yet another Scholarship, AOTC and 529 question

Post by TimeToThink »

On the $1500 rcvd, if there is no state law preventing it, I would contribute it to your 529 to take advantage of any state tax deduction you can, and then withdraw it.
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Katietsu
Posts: 7662
Joined: Sun Sep 22, 2013 1:48 am

Re: Yet another Scholarship, AOTC and 529 question

Post by Katietsu »

I think you are fine. A couple comments though.

Taxable scholarship income is considered unearned income and subject to the kiddie tax. If her only unearned income is the $1500, this will not come into play.

You can use 529 money to pay for tuition or books and for the AOTC. But, the earnings part of the withdrawal that goes to the $4000 of qualified expenses gets taxed as unearned income if you make this election.
Topic Author
kelvan80
Posts: 356
Joined: Sun Jan 12, 2014 9:06 pm

Re: Yet another Scholarship, AOTC and 529 question

Post by kelvan80 »

TimeToThink wrote: Fri Dec 03, 2021 5:50 pm On the $1500 rcvd, if there is no state law preventing it, I would contribute it to your 529 to take advantage of any state tax deduction you can, and then withdraw it.
We don't get a state deduction since we are military and his income is already state tax free. Good idea though. We are almost 100% sure we have already overcontributed to their 529s even though we have 4 kiddos. Mostly because of the GI Bill and contributing so early to the 529s.
Topic Author
kelvan80
Posts: 356
Joined: Sun Jan 12, 2014 9:06 pm

Re: Yet another Scholarship, AOTC and 529 question

Post by kelvan80 »

Katietsu wrote: Mon Dec 06, 2021 12:00 am I think you are fine. A couple comments though.

Taxable scholarship income is considered unearned income and subject to the kiddie tax. If her only unearned income is the $1500, this will not come into play.

You can use 529 money to pay for tuition or books and for the AOTC. But, the earnings part of the withdrawal that goes to the $4000 of qualified expenses gets taxed as unearned income if you make this election.
Yes she doesn't have any other earned or unearned income at this time. I anticipate in the next few years she will. We are military and always happen to move in the summer, plus covid this year we were still laying pretty low when possible.
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