Everything I read says Qualified Tuition Program (QTP) distributions are not taxable. Where did I go wrong when using Turbotax Deluxe? See attached details?.

[caspermiller]

All of the following information applies to Turbotax Deluxe software, 2018 1098-T Statement received from college, Form 1099-Q page 3 Turbotax printout, and Schedule 1, line 21.  Here's the data:  

1098-T Statement; box 1=$54,184, box 5=$43,910, boxes 3 and 8 are checked and all others are blank.

  Form 1099-Q page 3 Turbotax printout, Qualified Tuition Program (QTP) Computation of Taxable Distribution, For Purposes of  Regular Tax column (10% additional tax does not apply), Line 1=$11,468; Line 2a=0, Line 2b=$274, Line 2c=$274, Line 3=$1194, Line 4=$2874, Line 5=0.0239, Line 6= $69, Line 7=$2805.  Schedule 1, Line 21= $$2805.    

Everything I read says QTP distributions are not taxable.  Why is the $2805 considered income?

[Hal_Al · Accepted solution]

1098-T: box 1($54,184) minus box 5($43,910) = !0,274 Qualified expenses.

Line 2b (adjusted qualified expenses) of the 1099-Q worksheet (ws) is only $274.

Where did the other $10,000 go? TurboTax assumed it was used to claim a tuition credit. So, it has correctly calculated the taxable portion of your 1099-Q.

TurboTax assumes you will claim a Tuition credit, if you are eligible. So it reduces the amount used for the earnings exclusion, on the 1099-Q, for the amount used for the credit. You are not allowed to double dip.

Since the tuition credit is more generous than the earnings exclusion, that is the best way to file.

If you some reason, you are not eligible for the tuition credit, or do not want to claim it;

Go through the education section again. When you get to the screen that says “Here’s your Education Summary”.  Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.

Note that even if you use $0 to claim a credit, a small portion of the 1099-Q will still be taxable because $11,468 is more than $10,274.

[Carl]

Pay attention to what is in italicized bold text below.

1099-Q Funds

 First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to and included in the total on line 7 of the 1040.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is included in the total on line 7..

Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money. As of this writing, (3/26/2019) congress as not renewed the out of pocket expense deduction, which expired in 2017.

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.

[Dave B]

This is so buggy.  The generated forms were calculating that I had to pay taxes on 529 reimbursements when I knew I didn't.  After reading the above posts, I just stepped through the "Education Information" step again under "Education Summary" and then the taxes recalculated with zero changes from the first pass through this.  This is scary how disconnected the interview is from the tax forms and the number of things this gets wrong.