Level 3

Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. Example 2. Assume the same facts as in Example 1, except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). Total qualified education expenses $8,300 Minus: Tax-free educational assistance − 3,100 Minus: Expenses taken into account in figuring American opportunity credit − 4,000 Equals: Adjusted qualified education expenses (AQEE) $1,200 The taxable part of the distribution is figured as follows. 1. $950 (earnings) × $1,200 AQEE   $5,300 distribution = $215 (tax-free earnings) 2. $950 (earnings) − $215 (tax-free earnings) = $735 (taxable earnings)
Sara must include $735 in income (Schedule 1 (Form 1040 or 1040-SR), line 8). This represents distributed Chapter 8 Qualified Tuition Program (QTP)  Page 59
earnings not used for adjusted qualified education expen