It is fairly common knowledge that Congress has given us several ways to reduce our income tax bills when it comes to saving for and paying for college - both for ourselves and our children and grand children. What is not as well known is the general prohibition against "double dipping" - meaning using the same dollars to qualify for more than one tax benefit at the same time.
Section 529 of the Internal Revenue Code provides for tax-free income and growth as long as the distributions from the account are used for qualifying higher education expenses. Additionally, deductions are generally available on your state income return (subject to annual limits) for contributions to these accounts. Qualifying expenses, of course, include payments for tuition and books which can qualify you for the American Opportunity Tax Credit and/or the Lifetime Learning Credit. The problem is you cannot qualify for both provisions with the same dollars due to the "double dipping" rule.
Generally speaking, these tax credits are far more lucrative than the income exclusion provided by IRC Section 529, so when given a choice you are generally better off to choose the tax credit instead of the income exclusion. However, with careful planning, you may be able to structure your IRC plan withdrawals to pay for the "qualifying expenses" that are not tuition (e.g. room and board, travel expenses, electronic gear, etc.) and to pay the tuition with other funds.
Please give us a cll if we can help you make the right choice on your 2016 income tax return.
