Great answer! The article states that distributions can only be used to pay for one child's expenses. Also, if distributions are used to pay expenses of anyone other than the designated beneficiary they are subject to income tax plus the 10% penalty, and possibly recapture of state tax benefits.

The other issue I struggled with was segregating the education expenses paid with the 529 plan from those used for the AOC. However, I found that you designate the expenses used for the credit, and then the surplus can flow to the 529 plan distribution on the qualified expenses page.

Then comes the exception to the 10% penalty if the reason for not applying the 529 plan distribution is taking the credit. That is a lot of work to deal with a 529 plan distribution!

In the case of my question, they do have to pay the extra penalty however.

Thanks!!