Technical correction provides a break from penalty
The correction makes clear that the 10% additional tax on non-qualified withdrawals does not apply to taxable income caused by the reduction in "qualified higher education expenses" for taxpayers claiming the Hope or Lifetime Learning credit. This is a welcome change, because prior to the technical correction a 529 or Coverdell participant could be exposed to the penalty simply by qualifying for the credit. The exception will work much like the exception for scholarship withdrawals, i.e. the earnings portion will be subject to federal income tax but will not incur the 10% additional tax.