Taxpayers with qualified educational expenses are often entitled to claim education credits on their U.S. tax returns - specifically, the American Opportunity Credit and the Lifetime Learning Credit.
However, taxpayers cannot "double-dip" into multiple education benefits. Among other implications, this means that qualified educational expenses paid with Qualified Tuition Program withdrawals cannot be used to figure the American Opportunity Credit. A common Qualified Tuition Program is a 529 plan.
In practical terms, if you have $5k in educational expenses and $5k in 529 plan distributions, you generally cannot claim the AAOC or LTC (unless you choose to maximize your credit by including some or all of the 529 distributions in taxable income).
FreeTaxUSA, a member of the IRS Free File Alliance, does not ask for information about QTP withdrawals when calculating education credits. In the example scenario I gave, FreeTaxUSA would generate a return claiming the full $2500 AAOC credit - even though you are entitled to a credit of $0.
I have reported this bug to them, and hopefully they will fix it. But I am also posting here to ensure people don't get caught by this and file incorrect returns.
For reference, the "no double benefit" rule is documented in IRS publication 970: https://www.irs.gov/publications/p970#en_US_2017_publink1000178546.
Submitted January 16, 2019 at 08:56AM by IEatTehUranium http://bit.ly/2Fwv9IH
