1099-Q and 1098-T

[jhichew]

I (parent) received a 1099-Q for my daughter's college education. My daughter is not a dependent on my return this year. The 1099-Q is in my name - not my daughter's. The 1098-T is in my daughter's name. I entered the 1099-Q on my return since it is in my name.

Since my daughter is not a dependent on my return for 2022, I cannot enter her 1098-T to prove the tuition that I paid to offset the tax that I may be paying on the earnings I made on the Qualified Education Program.

Is there a way to record this so I do not pay taxes on the earnings?

Thanks in advance.

[SharonD007]

Yes, if your child’s educational expenses are equal to or exceed the 1099-Q distribution, the earnings are not taxable. The 1099-Q should be reported on the tax return of the person whose SSN is on the form (your tax return) and it only needs to be reported on the tax return if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. In that case, the earnings on the excess distribution would be taxable income. To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement and the IRS link on Qualified Education Expenses.

To determine if you need to report the 1099-Q, add up the tuition paid from the 1098-T in box 1 plus the qualified education expenses and subtract the amount that was refunded. If the total is more than the amount in box 1 of the 1099-Q, you do not need to report it.  If the total is less than the amount in box 1, some of the earnings in box 2 of the 1099-Q will need to be report the 1099-Q on your  tax return as ordinary income and you will pay an additional 10% penalty tax as well on that amount.  TurboTax will ask you questions as you enter the 1099-Q and make the calculations. The gain is not reported, if it was used for qualified education expenses.

Your child can report the 1098-T on her tax return and she may also qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit if it is not for the same expenses that were paid from the 1099-Q withdrawal. When a student’s school expenses are paid with these funds, they cannot claim a tuition deduction or either of the educational tax credits for the same expense. For example, If the 529 Plan withdrawal was $5,000 and the tuition and qualified educational expenses are $10,000, you can claim a $1,000 lifetime learning credit on $5,000 of expenses, and the qualified expenses on your 529 plan will be reduced by $5,000.

Please see the TurboTax article What Are Education Tax Credits? for additional information.

[Hal_Al]

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 your daughter  to claim the tuition credit, on her return. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

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." 

Assuming you want to enter it anyway:

Q. Is there a way to record this so I do not pay taxes on the earnings?

A. Yes.  It's actually much easier to enter, in TT, when the student-beneficiary is not your dependent. 

Instead of entering the educational expenses in the education expenses section, you get to enter it in the 1099-Q section of TT. When asked who is the student, check "someone not listed here" . On the next screen, enter the  student's name.  This will eventually give you one simple screen to enter all expenses, including the info on the 1098-T. Press Done at the 1099-Q summary screen, to get to that screen.

[jhichew]

Thanks Sharon. 

I think why this is confusing is because I had claimed my daughter as a dependent originally, and I entered the 1099-Q (in my name) as well as her 1098-T (even though it was in her name).  When I removed my daughter as my dependent in TT, I went from getting a refund to owing money.  

Then in Smart check it found 5 areas of concern.  The main concern was the 1098-T form was entered and was asking who the 1098-T was for (me or my wife since we were the only others in this years TT, after I removed my daughter as a dependent).  So I deleted the form 1098-T because it did not pertain to me or my wife.

Then, since I still had the 1099-Q entered (with me as the beneificiary or owner) there was no data that showed the tuition and educational expenses that I paid which exceeded the amount of funds received from the 1099-Q.  It still showed me owing money.  I then found a question and answer after the 1099-Q in TT that asks who were these funds for - me, my spouse or "someone not listed here"?  I chose the latter and then it asks for my daughter's name and then it opens up a form asking how much was spent on Tuition, Books, Room and Board and Other Adjusments.  After inputting the Tuition, Books, R&B, etc., I switched from owing money to a refund.

My next question is, the 1099-Q was about $6200 in Box 1.  The tuition and educational expenses paid in 2022 was about $27,000.  You mention my daughter (not my dependent this year) can enter her 1098-T on her return "if it is not for the same expenses that were paid from the 1099-Q withdrawal".  Since the tuition and education expenses far exceed the funds received from 1099-Q, can she still be eligible for the educational tax credits on her return, even though I entered the educational expenses in the TT questionnaire after the 1099-Q entry on my return?

[jhichew]

Thank you.  Yes, I found this "form" after the 1099-Q section and it asked who the funds were for and since my daughter was not listed on my return, I selected "someone else not listed here".  I then entered her name and TT came up with the "form" that basically has the same fields as her 1098-T but it is not filling in a Form 1098-T.  It asks for:  Tuition, R&B, Books, Other Adjusments (ie:  Scholarships).  I entered the educational expenses from her 1098-T here and it offset the funds and income received from the 1099-Q and brought me from owing money to getting a refund.  

In hindsight, I should have just deleted the 1099-Q I entered, since it does not need to be entered and I would be able to prove that the educational expenses far exceeded the funds received on the 1099-Q.