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@sjrcpa wrote:

If Dad used the money for qualified education expenses of the son beneficiary - no tax,

RB: well, maybe.

no penalty.

RB: agree.

I wish it were that simple but I had one last year that was a mess.  Grandma never told me she opened a 529 plan for granddaughter umpteen years ago and in 2020 decided to cash out the entire plan and give all of the money to granddaughter in her first year of college.  Mix that up with charges for Fall 2020 & Spring 2021 tuition / room & board, much of which was credited back because the school decided to do distance learning and the granddaughter lived at home with a lighter course load than she originally applied for.

So I started digging and it ended up that the parents were "in the zone" for AOTC.  So we were able to maximize AOTC on the parents' return but that meant that we couldn't "double dip" on those expenses to make all of the 529 plan non-taxable.  Using the expenses to claim a credit (and/or having expenses paid by scholarship) is enough to get out of penalties.

So maybe ex-wife or daughter will use the expenses to claim AOTC and dad can't double dip with them.

IMO this whole concept is completely broken.  I was lucky enough to have a cooperative granddaughter/daughter to get the information needed to maximize the tax savings for the family (at the direction of my client) but there are plenty of situations where one taxpayer can't get the information needed to file a complete and accurate tax return.

In this particular case, I'd at least ask if there's any AOTC involved on somebody else's return but since it won't be on Dad's return, I'm not subject to due diligence for it.

My client was not thrilled about the bill (I charge by the hour) but I put a note on it explaining how much we were able to save "the family" in taxes by doing all of the research and going line by line through the tuition bills to grab everything we could possible find that qualified.  I attached a detailed calculation and identified the granddaughter so maybe the IRS can "find" education expenses on the 1098-T under her name/SSN.  No idea if it's enough to avoid a nastigram but we're 10 months into a 3 year SOL...

Are we having fun yet?

Rick