This is a really comprehensive discussion! I wanted to add one more consideration that might be helpful - timing of the 529 withdrawal versus when you claim the AOTC. If you haven't filed your taxes yet, you might want to consider whether it makes sense to claim the AOTC this year or wait until next year, depending on your overall tax situation. The AOTC can be claimed for up to 4 years per student, so you have some flexibility in timing. For example, if your income this year puts you near the phase-out range for the AOTC (starts phasing out at $80,000 for single filers, $160,000 for married filing jointly), but you expect lower income next year, it might make sense to use 529 funds for all expenses this year and claim the AOTC next year when you'd get the full benefit. Also, since your mother-in-law would be responsible for the tax on any non-qualified portion, you might want to have a conversation with her about the overall family tax strategy. Sometimes it makes sense for the family to coordinate who claims what credits based on everyone's tax situations. The key is running the numbers both ways to see which approach gives your family the best overall tax outcome!

This thread has been incredibly helpful! I'm a tax professional and wanted to add a few clarifications that might help others in similar situations. First, regarding the timing flexibility that @Ethan Clark mentioned - this is crucial and often overlooked. The AOTC has a 4-year lifetime limit per student, but you can strategically choose which years to claim it based on your income levels and overall tax situation. Second, I want to emphasize the importance of documentation. When coordinating 529 withdrawals with education credits, keep detailed records showing: - Total qualified expenses (from 1098-T and receipts) - Amount allocated to AOTC claim ($4,000 maximum) - Remaining expenses covered by 529 funds - Any out-of-pocket payments Third, for families dealing with multiple tax filers (like when grandparents own the 529), consider having a family tax planning session early in the year. Map out everyone's expected income, tax brackets, and potential credits to optimize the overall family tax benefit. Finally, don't forget about state tax implications. Many states offer deductions for 529 contributions, and some have different rules for how education credits interact with 529 distributions. The strategies discussed here work great at the federal level, but always check your state's specific rules too. The coordination between 529 plans and education credits is complex, but with proper planning, most families can maximize their tax benefits across all available programs.

If you're filing as a resident alien after passing the substantial presence test, don't forget about FBAR requirements! If you had foreign bank accounts with a combined total of over $10,000 at any point during the year, you need to file an FBAR (FinCEN Form 114). This is separate from your tax return and has really steep penalties if you miss it.

This is such a common situation that catches so many former international students off guard! I went through the exact same thing a couple years ago. One thing I'd add that hasn't been mentioned yet - make sure you understand the "closer connection" exception. Even if you pass the substantial presence test, you might still be able to file as a nonresident if you can demonstrate that you have a closer connection to your home country than to the US. Since you moved back to your home country in August 2024, you might qualify for this exception for the portion of the year you were back home. You'd file Form 8840 (Closer Connection Exception Statement) to claim this. It considers things like where your permanent home is, where your family lives, where your personal belongings are, etc. Also, regarding software - yes, you can generally use regular tax software like TurboTax now, but be careful because most mainstream software isn't great at handling the dual-status alien situation or treaty benefits. The specialized services mentioned above might be worth considering given your specific circumstances with the scholarship income and the mid-year move back home.

is it possible that the IRS notice is about something besides the extra withholding? sometimes they send W-4s for other reasons too like if your allowances are way off from what they think you should claim. did the notice mention anything specific?

I've been through this exact situation! Got a similar notice when I increased my withholding by about $40 per paycheck. The IRS notice can be scary at first, but it's really just their way of confirming you made the change intentionally. What you did is totally normal and smart - having extra withholding helps ensure you don't owe money at tax time. The IRS automated system flagged the change because it was different from your previous withholding pattern, not because you did anything wrong. Make sure to read the notice carefully for response instructions. Usually they just want you to confirm that you authorized the W-4 change. You can typically respond by phone or mail. Don't stress about it - this is more of a security check than anything punitive. Keep doing the extra withholding if it works for your financial planning!

Quick tip from someone who works in benefits admin - check if either of your plans allows mid-year changes to FSA/HSA elections based on a "change in benefit eligibility." If her FSA is making your HSA contributions problematic, some plans allow you to adjust mid-year when you discover this kind of conflict.

I went through this exact same situation last year and here's what I learned: The key issue isn't whether you're on separate health plans, but whether her FSA can be used for your family's medical expenses when you file jointly. Since you mentioned she uses her FSA for prescriptions and doctor visits, it sounds like a general medical FSA. Even though you have separate insurance, the IRS considers her FSA as available to cover your medical expenses because you file taxes together. This technically disqualifies you from HSA contributions. However, I'd strongly recommend getting the actual plan documents from her HR department - not just asking them verbally. Look specifically for language about who can use the FSA funds. Some plans restrict usage to the employee only, which could change everything. If it turns out her FSA does disqualify your HSA, ask her benefits team about switching to a limited-purpose FSA during the next enrollment period. Many employers now offer this option specifically for situations like yours. You'd lose some FSA flexibility but gain HSA eligibility, which is often worth it given the triple tax advantage of HSAs.

I'm new to this community but experiencing the exact same issue! My refund dropped from about $3,100 last year to $2,200 this year, and I was convinced I'd made some mistake on my taxes. After reading through all these responses, I finally understand what's happening. I went back and compared my pay stubs like several people suggested, and sure enough - I was taking home roughly $80 more per paycheck this year. Over 12 months, that's nearly $1,000 that I had access to throughout the year instead of waiting for it as a refund. It's definitely a mental adjustment though! I had already mentally "spent" that expected refund on a vacation fund. Now I'm thinking about setting up an automatic transfer of that extra monthly take-home into a separate savings account so I can still have that lump sum feeling, but at least it'll be earning interest for me instead of the government. Thanks to everyone who shared their experiences - this thread probably saved me hours of confusion and worry about whether I'd filed something incorrectly!

As someone new to this community, I'm so relieved to find this discussion! I've been dealing with the exact same issue - my refund went from around $2,800 last year to just $1,950 this year, and I was absolutely convinced I had made some major error on my tax return. After reading through everyone's experiences and explanations about the withholding table changes, I finally understand what happened. I dug out my old pay stubs and compared them, and it turns out I was bringing home about $70 more per paycheck this year without even realizing it. That adds up to roughly $840 over the year, which explains a big chunk of why my refund was smaller. It's such a relief to know this is happening to so many people and that it's actually the IRS trying to make withholding more accurate rather than some mistake on my part. The "interest-free loan to the government" concept really clicked for me - I never thought about refunds that way before, but it makes total sense. I think I'm going to take the advice from some of the comments here and set up an automatic transfer for that extra monthly income into a separate savings account. That way I can still get the satisfaction of having a lump sum for spring planning, but at least it'll be earning interest for me instead of sitting with the government all year! Thanks to everyone who shared their stories - this community is incredibly helpful for newcomers like me who are just trying to figure out why their taxes seem "weird" this year.