Level 11

You really just have to run the numbers manually and see what works out best.  If there's AOTC you're hard pressed to find anything better, so usually that's a no-brainer.  But in this case, I agree it would be a waste to use up 1 of the 4 years of AOTC on such a small amount.  So you're left probably juggling T&F deduction, LLC and the tax on the 529 income.  That's going to vary by tax brackets (and possibly AGI limits).

You might be able to "fake" the optimizer into giving you the best choice between T&F and LLC by deliberately disqualifying AOTC.  But, to my knowledge, there's no way for ProSeries to factor taxable 529 plan into the optimization.  So any way you slice it, you're running scenarios and jotting the tax amounts down on a scrap of paper.  Sometimes state taxes come into play as well.  Here in VA, the T&F deduction will reduce VA tax but we have no education credits.  So sometimes T&F will result in a higher federal tax but reduce the VA tax by more than enough to offset.


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