1098-t and 1099 Q

[Jameshh]

my 25 year old married non dependent daughter is in graduate school. I paid her tuition with a distribution from a 529 plan - I was the recipient of the distribution (she is the beneficiary) and I paid the school to her account. I have received a 1099-Q for the distribution, and my daughter has received the 1098-T. What gets filed and by whom.

I am thinking she files the 1098-T but excludes the tuition amount from any credits, and I file nothing at all.

Help?

Thanks

[Hal_Al]

Q. I am thinking she files the 1098-T but excludes the tuition amount from any credits, and I file nothing at all.

A. That's one way to do. At first glance, it's the "correct"way.

But, it's not the best way.  She should claim all the tuition (up to $10,000) because that will get her the maximum tuition credit of (up to) $2000.  You claim the rest of the tuition, any books and a computer (if one was purchased for school) and room & board (even if she lived at home). The Lifetime Learning Credit is 20% of tuition paid. It is non refundable so it can only be used to reduce an actual tax liability. 

Even if you are in the 22% tax bracket, the family usually comes out better if she claims the full credit.  The box 1 amount on the 1099-Q is not what gets taxed.  It's the earnings in box 2 and it's only a percentage of that.  The 10% penalty will not apply because of the exception when the credit is claimed. 

[KrisD15]

Yes, if you are liable for the distribution, and you agree with the student that you claim the expenses to allow the distribution to be non-taxable, the student must also not claim the same expenses towards a credit. 

Tuition and fees on the 1098-T count towards an education credit, as well as books and supplies not paid through the school and therefore not listed on Form 1098-T.

Those expenses can count against the 1099-Q reporting a distribution, but Room and Board also counts for the distribution. 

If you need Tuition and Fees, have the student lower the amount reported in Box 1 by the amount you need. 

As stated above, there are other options to how you report the 1099-Q and how the student reports Form 1098-T

Going forward, make the distribution directly to the school or student so the student gets the 1099-Q.

Remember that the American Opportunity Tax Credit can only be claimed 4 times PER STUDENT, including any times you may have claimed it for this student. 

Pub 970

@Jameshh 

[Hal_Al]

Grad students are not eligible for the American Opportunity Credit, unless they she received her bachelors degree in 2024 and then started grad school. Books and supplies are not eligible expenses for the Lifetime Learning credit. But, they are for a 529 plan distribution.