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VikingsRule
Returning Member

529 money used to pay off a student loan

A little background - My daughter had approx $6,500.00 (actually a wee bit over) in student loans when she graduated. She graduated from college during COVID. She did not have to start paying on the loan due to that. Then, the whole Biden-$10,000 forgiven fiasco happened and she waited to see what was going to happen with that. She has been in the work-world for a bit over 3 years now. Now that everything is settled, we went ahead and took out $6,500.00 from her 529s. We have received the 1099-Qs. Everything I have read states that the first $10,000 from 529s is tax-free for paying towards a student loan, but do I have to report it somewhere? If so which forms and which lines do I use? Also, what figures would I input to show the IRS what is happening so we don’t get audited. Finally, since my daughter has been out of college for a while and no longer a dependent, would it be on her return or would I still keep it on mine? HELP!

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2 Replies

529 money used to pay off a student loan

To enter your Illinois 529 Plan contributions for your son's education in TurboTax, please follow these steps:

  • In your return, select State Taxes tab
  • Proceed through the state interview section for Illinois, answering all questions on residency and income, until you arrive at a page entitled "Here's the income that Illinois handles differently"
  • Under Education, click on Start button for "College savings and prepaid tuition plan contributions"
  • On next page, "College Savings and Prepaid Tuition Plans", enter your 2016 529 plan contribution amount in the box for "Bright Start College Savings Pool" and click on Continue button
  • Finish the rest of the interview

If the Distribution doesn’t exceed the amount of the student's qualifying expenses, then the distribution is not Taxable and you don't have to report any of the distribution on your tax return.

 

The IRS does not request any additional information to substantiate whether or not your Distribution exceeded your actual qualified expenses. Nevertheless it would be wise to keep a good record of these expenses just in case your return gets picked up for examination.

 

If the Distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return.

 

When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. ... On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return.

questions for Illinois

 

Families grow and change all the time. Now that you have a new dependent, you may be able to save more on your taxes as a family. While there are qualifications for who you can claim as a dependent, we’ll help figure that out and make sure you get all of the advantages you deserve. Here are some things to note as you get started on your return.

 

1. You can claim a child born anytime in 2023 on your 2023 taxes

Assuming they meet all the other dependent qualifications, you can claim a child born anytime in 2023 on your 2023 taxes. When we ask how many months your newborn lived with you, always answer The whole year, even if your baby was born on the last day of 2023. Answer the same for any health care coverage questions if your newborn was insured from the date of birth, because you’re able to claim the child for the entire year, no matter when they were born in 2023.

 

2. You can claim adult dependents you support financially, even if they don’t live with you

If you financially support a relative, you can claim them as a dependent, even if they don’t live with you. They have to meet certain criteria, but if you cover 51% or more of their finances, you can add them to your list of dependents. And if you support an adult dependent that isn’t actually related to you by blood or marriage, then they must have lived with you for the entire year in order for you to claim them. Just tell us about all of your dependents and we’ll determine if they qualify.

 

3. You can claim certain credits

Fortunately, there are many credits available to help families with dependents. The Child Tax Credit and Credit for Other Dependents, can help with your children and relatives. The Child and Dependent Care Credit, is available to you if you paid for their care while you worked. You can also claim medical and education expenses you paid for your dependents. We’ll show you all of these as you go through TurboTax and help get you the refund you deserve.

 

4. Consider starting a state-sponsored 529 plan to save for college

If you have a new child, you might want to start a 529 plan to save for their future education expenses. Sponsored by your state, these plans are a way to put away money for your child’s tuition and college expenses. And when it comes time to withdraw for their education, you won’t pay income tax. Ask your bank or brokerage for more info on your state’s 529 plans and how to start one.

DawnC
Expert Alumni

529 money used to pay off a student loan

Don't report it on either one of your tax returns - it is not taxable.   

 

If you know that the distributions from the 529 plan are not taxable because they were used on qualified expenses, do not enter the 1099-Q forms.  For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return.   Keep the form and associated education expenses with your tax records.

 

Amounts can be withdrawn to pay principal or interest on a designated beneficiary's or their sibling's student loan. The amount of distributions for loan repayments of any individual is limited to $10,000 lifetime.   Interest paid with these funds doesn't qualify for the student loan interest deduction.   See IRS Topic 313

 

Room and board usually isn't considered a qualified education expense for the purpose of education credits.  The one exception is if room and board was paid for with a Coverdell ESA or 529 plan distribution. In that case, the cost can be deducted from the taxable part of the plan's distribution.

 

1099-Q Guide

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