10% penalty for excess 529 plan distributions

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    I would like confirmation on a point which I state informally below, by paraphrasing the more formal text of Pub.970.

    It has to do with a penalty of 10% of the taxable withdrawn earnings (in addition to the tax on it) that is in excess of any adjusted qualified educational expense (for 529 plans). The informal statement is: One can always withdraw money from a 529 plan up to the amount of a tax-free scholarship without the additional 10% penalty.”

    I want to know if I have understood the formal language of Pub. 970. A specific situation I face is as follows:

    Tuition: 57879
    Books: 554
    Room and Board: 15990
    Total Qual. Expenses: 74423
    Scholarship: 9848
    Used for AOTC: 4000
    ADJUSTED Qual. Expenses: 60575 (=74423-9848-4000)

    Withdrawal (from 1099-Q Box 1): 70393
    Earnings (from 1099-Q Box 2): 10538

    Based on the above data, I have a taxable amount of 1470 on the earnings owing to a larger distribution than the qualified expenses. (Calculated as [1-60575/70393] x 10538 = 1470.)

    The question is if I owe an additional 10% tax. Based on my understanding of the rules, as stated above informally, I think not.

    Please could someone clarify if my understanding is correct.

    Thanks very much in advance.

    • This topic was modified 2 years, 11 months ago by Dyons.

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