‍1. Calculate Qualified Expenses

First and foremost, it's crucial to determine which of your expenses are qualified under 529 rules. Only withdrawals for qualified expenses are exempt from the 10% penalty and federal income taxes. Qualified expenses include:

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• Tuition and fees
• Room and board (up to the college's official cost of attendance)
• Books and supplies
• Computers and related equipment
• Special needs equipment
• Repayment of student loans (lifetime cap of $10,000)

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For K-12 education, up to $10,000 per year can be used for tuition and fees at private schools. Non-qualified expenses include college applications, standardized testing, health insurance, travel costs, and sports expenses.

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2. Avoid Double-Dipping

It's essential to avoid using the same expenses to qualify for both 529 tax-free withdrawals and federal educational tax credits such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Here's how to manage this:

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• AOTC: Provides up to $2,500 annually per student. To claim the full credit, $4,000 of expenses must be paid with non-529 funds.
• LLC: Offers up to $2,000 on the first $10,000 of college expenses.

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Example Scenarios:

• Example 1: Withdrawing $4,000 from a 529 for $7,000 in college expenses only allows $3,000 to qualify for AOTC.
• Example 2: Withdrawing $50,000 from a 529 and using an additional $4,000 from savings allows full AOTC capture.

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Income limits for these credits are $80,000 or less ($160,000 for married filing jointly) for full credits, with phased reductions up to $90,000 ($180,000 for married filing jointly).

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3. Maintain Thorough Records

While your 529 provider will supply statements showing contributions, earnings, and withdrawals, it's crucial to keep detailed receipts of all qualified expenses. This documentation ensures you can accurately report and justify your withdrawals.

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4. Synchronize Withdrawals with Expenses

Ensure that the withdrawals from your 529 account match the payment of qualifying college expenses within the same tax year. You will receive IRS Form 1099-Q from your 529 plan, listing distributions, and IRS Form 1098-T from the college, listing tuition. It's vital that the withdrawn amounts align with the documented tuition and expenses.

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Action Items for Your Consideration

• Calculate your qualified expenses: Let’s review your anticipated expenses to ensure they align with 529 rules.
• Plan your withdrawals to maximize tax benefits: Schedule a meeting to strategize how to optimize your withdrawals while capturing federal educational tax credits.

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Keep meticulous records: Ensure all receipts and documentation are organized for accurate reporting.