If qualified education expenses are used for the AOC, then do distributions from a 529 plan become taxable on the state? I understand there is no double dipping, but the funds were still used to pay qualified education expenses.
Are there room & board charges? Fees that do not qualify for the AOTC? The 529 can be used for those expenses. If still not enough, to cover the 529 withdrawal. The program splits figures the % of interest not used and that becomes taxable to the owner of the account. Then if a state deduction was taken in previous years, the % of principal not used has to be reclaimed on the state. But principal is never taxable at the federal level, only earnings. I do this all the time to come up with max expense for the AOTC.
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