1098 T and 1098 Q

[manolokolo]

A 529 Plan distribution was sent directly to my daughter's college for tuition.  I will claim her as a dependent and do not qualify for education credits based on income.  My daughter is listed as the recipient on the 1099 Q.  My daughter has also received some scholarships.

A couple of questions:

1) Is the 1099-T reported on my (parent) tax return, my daughter's or both?

2) Is the 1099Q reported on my (parent) tax return, my daughter's or both? 

3) I understand that I can take a distribution in the amount of the scholarships without penalty.  Can the 529 plan distribution for the scholarship amount  be paid directly to me (parent) without triggering any penalties?

[Hal_Al · Accepted solution]

Q1.  Is the 1099-T reported on my (parent) tax return, my daughter's or both?

A1. Your daughter's, because you are not eligible for a credit and she was, technically,  the "recipient" of the 529 distribution.  The 1098-T is only an informational document and does not need to be reported unless it affects your tax return. It can go on either the student or parent's returns and sometimes both (with adjustments). 

Q2.  Is the 1099-Q reported on my (parent) tax return, my daughter's or both? 

A2. Your daughter's. When the 529 distribution goes directly to the college, the student is treated as the recipient of the funds. The 1099-Q is also only an informational document and is only reported when needed. 

Q.3.  Can the 529 plan distribution for the scholarship amount  be paid directly to me (parent) without triggering any penalties?

A3.  Yes. The scholarship penalty exception applies regardless of whether the beneficiary (student) or the owner (parent) is the recipient.  If any of it is taxable, the student may pay a little bit less tax because of their lower tax rate, depending on what other income the student has.  But, the "kiddie tax" (where a dependent's income is taxed at the parent's tax rate) kicks in after the first $2500 of unearned income (2023).  The scholarship exception applies only to the 10% penalty (for a non qualified distribution).  The  earnings portion, of the distribution (usually box 2 of the 1099-Q), is still taxable. 

An alternative is have the student report some of her scholarship as taxable income, to free up some expenses for the 1099-Q (and/or tuition credit, for eligible parents). Most people come out better having the scholarship taxable before the 529 earnings. A student, with no other income, can have up to $13,850 of taxable scholarship (in 2023) and still pay no income tax. 

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement (2023) and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  Taxable earnings distributions, from a 529 plan, is unearned income (the student's standard deduction is only $1250).

[manolokolo]

thank you.

Regarding the scholarship penalty exception, do I characterize the distributions in Turbo tax as paying expenses for my daughter? If the distribution is characterized as not paying for education expenses, the 10% penalty is applied by Turbo Tax.

[Hal_Al]

Q. If the distribution is characterized as not paying for education expenses, the 10% penalty is applied by Turbo Tax?

A. That's correct.

Q. Do I characterize the distributions in Turbo tax as paying expenses for my daughter?

A. Yes, if you actually had expenses, in the amount of the distribution, that were not paid by tax free scholarship.  Room & board (R&B) are qualified expenses for a 529 distribution. R&B are not qualified expenses for scholarships to be tax free (or for a tuition credit). 

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. 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. But, it will prepare a 1099-Q worksheet for your records. You  cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

References:

1. 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. You must determine the taxability of any distribution." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

It's not clear what you're trying to do.  Provide the following info for more specific help:

• Are you the student or parent (already answered)
• Is the  student  the parent's dependent (already answered)
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)? (already answered)
• Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student? (already answered)
• Is the student a degree candidate attending school half time or more?