I need help understanding the tax ramification of taking a taxable distribution from a 529 plan due to scholarships.
It appears that Publication 970 says that you can take a distribution equal to tax free part of scholarships without being subject to the 10% penalty.
My confusion is:
Do Pell grants and University grant classify as scholarships?
What about the part of scholarship made taxable to allow for the American Opportunity tax credit? Publication 970 appears to indicate you can add that back in.
Can you take distributions for prior tax years? I know that this not allow for regular distributions for QEE expenses.
Would this be correct:
Penalty free distribution (except for taxes on earnings)= Tax Free scholarships + part of scholarship made taxable for AOC