Taxable Portion of a Distribution
The part of a distribution representing the amount paid or contributed to a qualified tuition program doesn’t have to be included as income. This is a return of the investment in the plan. The designated beneficiary generally doesn’t have to include any earnings distributed from a qualified tuition program as income, if the total distribution is less than or equal to adjusted qualified education expenses. To determine if total distributions for the year are more or less than the amount of adjusted qualified education expenses, you must compare the total of all qualified tuition program distributions for the tax year to the adjusted qualified education expenses. Adjusted qualified education expenses are the total qualified higher education expenses reduced by any tax-free educational assistance. Tax-free educational assistance includes the tax-free part of scholarships and fellowship grants; Veterans’ educational assistance; the tax-free portion of Pell grants; employer-provided educational assistance; and any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
Coordination With American Opportunity and Lifetime Learning Credits
An American Opportunity or Lifetime Learning Credit can be claimed in the same year the designated beneficiary takes a tax-free distribution from a qualified tuition program as long as the same expenses aren’t used for both benefits. This means that after the designated 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.
Coordination With Coverdell Education Savings Account Distributions
If a designated beneficiary receives distributions from a qualified tuition program and a Coverdell Education Savings Account in the same year, and the total of these distributions is more than the designated beneficiary’s adjusted qualified higher education expenses, the expenses must be allocated between the distributions. For purposes of this allocation, disregard any qualified elementary and secondary education expenses.
Coordination With Tuition and Fees Deduction
A tuition and fees deduction can be claimed in the same year the designated beneficiary takes a tax-free distribution from a qualified tuition program as long as the same expenses aren’t used for both benefits.