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Can 529 plans be used for overseas education?

$5,000 American Opportunity Tax Credit and Educational 529 Plans (VPEP)?

  • I'm a little mystified. TurboTax seems to be telling me that if my two college kids' tuition was paid through the state's 529 plan (in my case, Virginia Prepaid Education Plan) that I can't apply those tuition bills to a deduction under the American Opportunity Credit, which seems the best fit among federal edu-tax-benefits for my higher income bracket. To me, philosophically, it makes no sense that the money I put in to the 529 plan was post-tax dollars, it wasn't federally deductible, and now those dollars have less standing than ordinary income used to pay tuition. I understand that I got some bump upwards in the value with untaxed fund growth, and it would make sense to be fair to Uncle Sam to factor out that increment of "free" growth. But giving up $5,000 in cash (times four years) worth of tax credits makes a great case for wishing I had never put those post-tax dollars in a 529 plan. Am I missing something?

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Go read IRS pub 970 starting on page 68. You have a choice. You can claim the credit and NOT use the same tuition dollars to exclude the earnings on the 529 plan or you can do the opposite. Only the earnings on the 529 are at issue. That's the deferred tax growth from having the accounts. If your children include the earnings in their income, they will NOT owe the 10% and their tax bracket should be no more than yours. You can't have both unless the tuition bill was waaaay more than $4000 for each child.

That's the problem with using TurboTax. In my opinion you have the right answer. If earnings were used to pay for tuition, then they would be excluded from the credit calculations. The basis you have in the 529 would still be able to be used for purposes of the credit.

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