1098t and 1099q don't match, tuition paid from 529 do we have to pay penalty?

[cjzimmer2]

I had tacked this on to another post of mine but since it didn't get answered I'm posting it again separately.

Background DS is a 5th year student who lives at home and is NOT a dependent this year.  This is the first year we used funds from the 529 so not sure we are handling all the aspects correctly. 

College billed (and DS paid) 7632.47.  Of that 6585.63 was labeled as tuition and 1063.84 was labeled as fees.  Not entirely sure what fees goes to as they don't break it down any further and the fees are required to attend.

Plus he had 27.42 for a required book that he bought elsewhere.  No room and board (he lives at home), no other expenses.

DS's name and SS are on the  1099 q 

Box 1 $7629.83 (I forgot to include the book and I rounded down the requested amount a couple of dollars one semester to an even number).  

Box 2 1827.70

His 1098T from the college says $7144.78 in Box 1.  All other boxes are blank (he doesn't receive financial aid) except the one checked at least half time student.

Questions

The 1098 T is less than what he paid the college.  I know I can go to the "hidden" box and enter the amount we actually paid but "should" he.  Are some of the fees he had to pay considered unqualified expenses?  Is that why the college lists a lower amount?  Surely they know better than I what those fees are used for and if they are a qualified expense or not but at the same time we don't have any choice about paying them. 

1099 Q amount was based on what he paid (and we thought were all qualified expenses since it was required to be paid to school).  However it is higher than what the school lists. I know I can skip entering it "IF" he has matching qualifying expenses but does he? Currently if I enter both forms exactly as given to him, he has an overdraw on the 1099 and gets hit with the penalty plus all the amount of Box 2 is showing as income.  Leaving it off solves both issues but because of question above I'm not sure if I'm legally entitled to not report the 1099 Q

Last question,  We have claimed the 4 years of AOC when he was a dependent.  Even though he is now independent, I know he is not eligible for the AOC however, is he eligible for the lifetime learning credit?  Or is paying with 529 funds and claiming the credit what is considered double dipping? My brain is getting overloaded with all the technicalities and I want to make sure I'm doing it correctly.

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[#2]

I had tacked this on to another post of mine but since it didn't get answered I'm posting it again separately.

Background DS is a 5th year student who lives at home and is NOT a dependent this year.  This is the first year we used funds from the 529 so not sure we are handling all the aspects correctly. 

College billed (and DS paid) 7632.47.  Of that 6585.63 was labeled as tuition and 1063.84 was labeled as fees.  Not entirely sure what fees goes to as they don't break it down any further and the fees are required to attend.

Plus he had 27.42 for a required book that he bought elsewhere.  No room and board (he lives at home), no other expenses.

DS's name and SS are on the  1099 q 

Box 1 $7629.83 (I forgot to include the book and I rounded down the requested amount a couple of dollars one semester to an even number).  

Box 2 1827.70

His 1098T from the college says $7144.78 in Box 1.  All other boxes are blank (he doesn't receive financial aid) except the one checked at least half time student.

Questions

The 1098 T is less than what he paid the college.  I know I can go to the "hidden" box and enter the amount we actually paid but "should" he.  Are some of the fees he had to pay considered unqualified expenses?  Is that why the college lists a lower amount?  Surely they know better than I what those fees are used for and if they are a qualified expense or not but at the same time we don't have any choice about paying them. 

1099 Q amount was based on what he paid (and we thought were all qualified expenses since it was required to be paid to school).  However it is higher than what the school lists. I know I can skip entering it "IF" he has matching qualifying expenses but does he? Currently if I enter both forms exactly as given to him, he has an overdraw on the 1099 and gets hit with the penalty plus all the amount of Box 2 is showing as income.  Leaving it off solves both issues but because of question above I'm not sure if I'm legally entitled to not report the 1099 Q

Last question,  We have claimed the 4 years of AOC when he was a dependent.  Even though he is now independent, I know he is not eligible for the AOC however, is he eligible for the lifetime learning credit?  Or is paying with 529 funds and claiming the credit what is considered double dipping? My brain is getting overloaded with all the technicalities and I want to make sure I'm doing it correctly.

[Hal_Al]

Why do you think DS is not a dependent this year?

Does  he have any income? 

The Lifetime Learning Credit (LLC) is a non refundable credit equal to 20% of expenses paid (up to $10K). So if he has no tax liability he can't claim the LLC.

He is allowed to claim "board" (but not room) if he lives at parent's home. So he has more than enough expenses to not report the 1099-Q  (unless he can and  wants to use some expenses for the LLC). Yes, you can legally not report it. 

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." 

If you know the 1098-T to be wrong, use the "hidden box" to put in the right amount. Yes, you can count the fees. Better, yet just leave off the 1098-T (and the 1099-Q), if you're not claiming a credit. 

[cjzimmer2]

DS is 23 was only a part time student each semester of 2020 and he made 40k.  Sorry I forgot to include those details from the previous post.  So we know he has to file as independent.

So he definitely has tax liability which if I understand correctly means he could use LLC.  But I'm still not sure if expenses that were paid from his 529 can be included in the amount used to calculate the LLC or if it's only the expenses incurred over and above the amount we withdrew from his 529.

I didn't know he could claim "board" when living at home even if he pays nothing for it.  It sounds like no matter how the 529 expenses are handled, we should still figure out the value of board because that would be eligible for LLC no matter what. Correct?  Is there a formula for determining the value of board?

[Hal_Al · Accepted solution]

For board, you may use the lower of actual cost or the school's board allowance (essentially the meal plan charge) for on campus students.  Board is an eligible expense for the 529 distribution. It is not an eligible expense for the LLC.

You are allowed to allocate your expenses.  The LLC is better (20% savings) than the 529 (12% tax rate), so allocate all the tuition and fees ($7632) to it.  Book cost is not eligible for LLC but is for 529. Computers and software are also eligible 529 expenses.

TurboTax can handle this cumbersome calculation, but follow the interview carefully. You'll eventually reach a screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use ($7632) or change it.  It's best to enter the 1099-Q first, then the 1098-T and expenses. 

If you don't get the  “Amount Used to Calculate Education Deduction or Credit” screen, Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. That should  get you  to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.

[cjzimmer2]

Thank you so much.  This was very helpful.  The full tuition ($7632) was assigned to the LLC.  I was able to determine a value for board as the college listed a board amount for commuter students in it's cost of attendance so that plus the book expense went against the 529 and the remainder of the funds  ($5373) from the 529 was listed as excess distributions and taxed at the regular tax.

But this has created a question on my state tax (WI).  The state allows you to take a tuition deduction (separate and apart from any federal deductions/credits)  for attending a school in WI or MN so long as funds from certain kinds of 529 wasn't used.  Our 529 is one that can't be used.  However, since DS's tuition was applied against the LLC and only room/board/books was applied against the 529, can he still claim the full tuition amount for the state credit? 

[Hal_Al]

I'm not familiar with MN.  But, a quick google search and search (find) of the MN instructions seems to say there is no such deduction.  You may want to ask a fresh question (rather than tagging on here) to get more eyes on that topic.