1098-T (with scholarship) in student name, but 1099-Q (529 distribution) in owner (parent) name. Who files which?

[Tuser101]

First year dealing with 1098-T & 1099-Q and should have asked for distribution in student (beneficiary) name to simplify tax reporting. Need to sort out who should file what. Does student file the 1098-T and parent file the 1099-Q (or something else)?

When parent (529 owner) filled out Turbotax, there was a pop-up with instructions how to report this as Turbotax indicated student had taxable income. I cannot find that pop-up and even going through the interview again, it does not pop-up.

Background info:

1098-T reported tuition and educational expenses ~$12,000 (box 1) with scholarship ~$7,040 (box 5) in student's name/SSN.

1099-Q reported $10,000 (box 1) distribution roughly 55-45 basis-earnings in parent (owner) name/SSN.

Remaining tuition and educational expense after scholarship is $4,960 ($12,000 - $7,040). 

529 distribution not covering 1098-T tuition and educational expense is then $5,040 ($10,000 - $4,960), so is taxable.

However, room & board was $11,000 which more than covers the $5,040 remaining 529 distribution, so the $5,040 is no longer is taxable.

Parent is not eligible to claim any educational credits due to income and no tax benefit for claiming student as a dependent also due to income.

Student (single taxpayer) has minor earned income <$2,000 and unearned income <$100. However, if not claimed as a dependent on parent return, student can qualify for AOC credit ($50).

Based on this background, it appears the student should file as a dependent that will NOT be claimed by someone else (parent) and include the 1098-T in their return. Parent should not claim student as a dependent and file 1099-Q (as they were recipient, not beneficiary) in their return. Is this the best way to handle it?

Note: both 1098-T and 1099-Q both state information is being provided to the IRS. However, other community questions have been answered that the 1099-Q is not required to be filed.

[Hal_Al]

Q. 1098-T (with scholarship) in student name, but 1099-Q (529 distribution) in owner (parent) name. Who files which?

A. Nobody files either one. 

The 1099-Q and the  1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return. You know the 1099-Q is fully covered by expenses (even if somebody could claim the AOTC), so it does not need to be reported.*

Q. Based on this background, it appears the student should file as a dependent that will NOT be claimed by someone else (parent) and include the 1098-T in their return?

A. No.  Students, under 24, are not eligible for the refundable portion of the AOTC, even when not claimed as a dependent.**  He could qualify for  the non-refundable AOTC, but he does not have enough income to have a tax liability.  The AOTC can only be claimed 4 times on a student's undergrad education. You might want to wait to use it later.

Q, Parent is not eligible to claim any educational credits due to income and no tax benefit for claiming student as a dependent also due to income?

A. The income limit for the AOTC is $90K ($180K MFJ). The phaseout for the $500 Dependent Credit starts at $200K ($400K married)

*The 1099-Q is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you can. 

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 don’t need it). You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships.

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”.
3. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 

**There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit. 

You cannot claim the (up to) $1000 refundable credit if you are, or can be, claimed as a dependent by someone else.

Reference: Line 7 instructions for form 8863.

https://www.irs.gov/instructions/i8863#en_US_2024_publink53002gd0e674