Question

Dianne Ruth withdrew $8,000 from her educational savings account and used $6,000 to pay for qualified higher education expenses. The remaining balance of $2,000 was used to purchase clothes. On the date of the distribution, her educational savings account had $25,000 balance including $20,000 she had contributed.

How much of the $8,000 is tax free?

Answer 1

$7,600

Step-by-step explanation:

Calculation to determine How much of the $8,000 is tax free

Step 1 is to calculate the % using this formula

%=Savings ratio ROC Contributed/Total balance

Let plug in the formula

%=$20,000/$25,000

%= .80*100

%=80%

Step 2 is to calculate the ROC tax free using this formula

ROC tax free=% x Distribution

Let plug in the formula

ROC tax free=.80x 8000

ROC tax free=$6,400

Step 3 is to Contained earnings in distribution using this formula

Contained earnings in distribution=Distribution - ROC tax free

Let plug in the formula

Contained earnings in distribution=$8,000-$6,400

Contained earnings in distribution= $1,600

Step 4 is to calculate Excludable earning using this formula

Excludable earning=(Qualified exp/distribution ) x Earning contained

Let plug in the formula

Excludable earning=($6,000/$8,000) x $1,600

Excludable earning= $1,20/

Step 5 is to calculate the Taxable amount using this formula

Taxable =Earnings - Excludable

Let plug in the formula

Taxable=$1,600-$1,200

Taxable =$400

Now let determine the Tax free using this formula

Tax free = Distribution- Taxable

Let plug in the formula

Tax free=$8,000- $400

Tax free=$7,600

Therefore How much of the $8,000 is tax free will be $7,600