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Level 1

# 1098T 1099Q and the impact of a scholarship?

Doing daughter's taxes; she is grad student, not a dependent.

It appears that she is being taxed for distribution from her 529, (1099Q) even though the distribution was entirely for tuition paid.

1098T box 1 shows the amount paid to the university, \$79,045.   Box 5 reflects a scholarship, \$25,000.

1099Q reflects distribution of \$60,533.

TT appears to subtract the scholarship from the amount actually paid to the university, resulting in a taxable portion of the 529 distribution.  (on the TT 1099Q form, Line 2c shows an adjusted qualified education expense that nets the scholarship from the amount actually paid, ie \$54,046.)   I am not able to adjust the amount on line 2c.

I would appreciate any guidance on this!

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3 Replies
Level 15

## 1098T 1099Q and the impact of a scholarship?

TurboTax (TT) is doing it correctly. 1098-T box 1 shows the amount paid to the university, \$79,045.   Box 5 reflects a scholarship, \$25,000. That means she has \$54,045 (79,045 - 25,000 = 54,045) of qualified expenses to apply to the 1099-Q.

You need to come up with \$6488 (60,533 - 54,045 = 6488) more expenses. Books, a computer and room and board are qualified expenses for a 529 distribution, even if the student lives off campus, or even in the parent's home.

If you can't come up with \$6488, some thing has to be taxable; either part of the scholarship or part of the 529 distribution. Depending, on her other income, the scholarship is usually best. If you can come up with \$6488, then just don't enter the 1099-Q. The TT process is complicated and mistakes are frequent.

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 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. 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

Aside: Being a grad student doesn't disqualify her from being a dependent.

___________________________________________________________________________________________

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 \$13,850 of taxable scholarship (in 2023) and still pay no income tax.

Level 1

## 1098T 1099Q and the impact of a scholarship?

Thank you so much for your quick answer!  I'm still confused on one point.  Total tuition for 2023  was the amount paid (box 1) PLUS the scholarship (box5).  Why isn't all of box 1 a qualified expense when it was true out of pocket tuition paid directly to the university?

The 1099 worksheet seems to be the problem --- I was able to override line 2c with the full box 1 amount, but maybe I am just better off in NOT entering the 1099-Q at all?  Thanks so much for your help!

Level 15

## 1098T 1099Q and the impact of a scholarship?

Basically, it doesn't matter what actual money was used to pay for what expenses, at tax time you are allowed to allocate expenses for the best tax benefit. TT is going to allocate box 1 tuition to the box 5 scholarship even if you consider it " true out of pocket tuition paid directly to the university".

Q. Maybe I am just better off in NOT entering the 1099-Q at all?

A. Yes, unless you're able to work your way through the idiosyncrasies of the program.

You didn't mention whether you are eligible for the education credit (American Opportunity Credit) which would require allocating \$4000 of tuition to it. You would need to  come up with \$10,488 more expenses  (Books, a computer and room and board) , rather than \$6488.