1098 T and 1099Q

[JulieG18]

This is my first time working with the 1098T and 1099Q.   My child is 19 and a fulltime student who is our dependent.   Both forms list her and her SSN.    We pay her expenses directly via the state 529 plan we set up with her as beneficiary (funds sent directly to school from plan)  and we also pay the remaining balance as well.  Who files these forms?   Us as her parents or her?

[Hal_Al · Accepted solution]

Q. Who files these forms?   Us as her parents or her?

A. Simple answer: You (parent) file the 1098-T to claim the education credit. Nobody files the 1099-Q because the distribution was (apparently) fully covered by adjusted qualified expenses.

That said, an exact answer depends on the actual numbers.

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Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit regardless of whose money was used to pay the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board which is only qualified for the 1099-Q)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**Alternatively; 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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, in case of an IRS inquiry.

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." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. A student, with no other income, can have up to $14,600 of taxable scholarship (in 2024) and still pay no income tax. 

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Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• 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”)?
• 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?
• Is the student a degree candidate attending school half time or more?

[JulieG18]

provide the following info for more specific help:

• Are you the student or parent.  PARENT
• Is the  student  the parent's dependent.   YES
• Box 1 of the 1098-T  $4001
• box 5 of the 1098-T  $0
• Any other scholarships not shown in box 5  NO
• Does box 5 include any of the 529/ESA plan payments (it should not)  NO
• Is any of the Scholarship restricted; i.e. it must be used for tuition  N/A
• Box 1 of the 1099-Q  $7476
• Box 2 of the 1099-Q  $2344
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?  STUDENT
• 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.  $5993
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers 0
• How much taxable income does the student have, from what sources    $2721
• Are you trying to claim the tuition credit (are you eligible)?  YES
• Is the student an undergrad or grad student?  UNDERGRAD
• Is the student a degree candidate attending school half time or more?  FULLTIME

[Hal_Al]

You can claim the AOTC. As previously advised, enter the 1098-T on your return and TurboTax will give you the tuition Credit ($2500, unless you have less than $1500 tax liability, in which case your tax will be reduced to 0).

You claiming the AOTC,  will require allocation of $4000 of the tuition to the AOTC. This means she has less than $7476 of expenses, so some of the 1099-Q (529 distribution) will be taxable. So, she will have to enter the 1099-Q, on her return.  She should enter the 1099-Q first, then enter the 1098-T (even though you already used it on your return) later in the educational expenses section of TT.  Answer yes when asked if you have book expenses (that gets you the screen to enter room and board).  In her interview, you should eventually reach a screen called "Amount used to calculate education credit" (or similar wording).  Be sure the amount in that box is $4000.  Her reportable amount of income  will be $465.* If TurboTax arrives at a different number, or you have trouble with the program, reply back and I'll give you a workaround. 

If you can come up with another $19 in expenses (a book, more food), she could actually avoid filing a return. Right now, I estimate she will have to file to pay $2 in tax.  This assumes her $2721 of other income is earned income. Or, if you don't need the full $2500 of AOTC, to get to zero tax, on your return, we could shift $19 of tuition to her return.

*  $9994 in educational expenses(4001 + 5993)

   -$4000 used to claim the American Opportunity credit

 =$5994 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $7476

Box 2 is $2344

5994/7476 =80.177% of the earnings are tax free; 19.823% are taxable

19.823% x $2344 = $465

There is  $465 of reportable income (on the recipient’s return)

If TurboTax arrives at a different number, or you have trouble with the program, reply back and I'll give you a workaround. 

[JulieG18]

Thanks for the quick response.   I think maybe I'm missing something.

In addition to the $7476 (529 distribution), we made paid $3400 directly to the university. Everything paid went toward required fees, tuition, room and board.  So if I understand correctly, this should mean she would not need to enter the 1099 Q.

Some of her income is unearned interest so I believe she will still need to file a return, but won't owe any taxes.   

Does this sound correct?

[KrisD15]

You need 4,000 expenses paid out-of-pocket to get the full credit, which is what you want.

The 1098-T shows 4,001 in box 1 and you want that (or at least 4,000 of that ) to be used for a credit.

So that leaves $1 tuition to offset the distribution

Room and board can offset a distribution and you have 5993 for that.

So, 5994 can offset the 7,476 distribution. 

That leaves 1,482 taxable distribution. 

Tax is not computed on this remaining amount, it is a portion of the earnings only, the basis (your contributions) are not taxed. 

Tax on a distribution is calculated on a strange formula involving the eligible expenses used towards the distribution divided by the total distribution times the earnings. 

This comes out to be 465

The student needs to claim 465 for you to use 4,000 and get the credit. 

Yes, you paid 3,400 out-of-pocket, but you want 4,000 so makes sense that the student is claiming a little ($465) so that you can get a lot ($2,500 credit) 

(The amount the student needs to claim is not 600 because part is your contributions to the 529 account which is not taxable) 

Pub 970 might explain further 

[Hal_Al]

You listed your expenses as $4001 tuition and $5993 R&B = 9994.   $3400 + 7476 = $10,876.

10,876 - 9994 =  882.  What did the other $882 pay for?  If qualified expenses, then yes, the taxable amount is reduced. Apparently enough, that she doesn't HAVE TO file.  However, if she needs to file to get a refund of withholding, technically you are suppose to go to the trouble of adding the taxable amount, even though it doesn't matter (no change in the refund amount). 

(5994 + 882) / 7476 = 91.97% of the distribution is qualified. 8.025% isn't

0.08025 x 2334 = $187 reportable unearned income 

Q. Some of her income is unearned interest so I believe she will still need to file a return, but won't owe any taxes.   Does this sound correct?

A. No.  It depends on the amount of interest. If less than $263, then she doesn't need to file. If more, she must file and will owe tax. There is no situation, where she has to file and there is no calculated tax.