1099-Q being incorrectly assumed to cover 1098-T expenses

[doingmytaxestoday]

Hi - I've read through all the 1099Q/1098T questions, and the information is really helpful, but unfortunately none of the threads seemed to quite capture my issue.  If you could please provide any insight on the below it would be much appreciated.  

As owner of a 529 for my college student / designated beneficiary son, we correctly have two 1099Qs for two distinct events:

- A distribution in my son's name for the entirety of his tuition for the Fall which was sent directly to the school

- A distribution in my (the owner's) name for a distribution I took mostly for unqualified expenses, except for the qualified expense of a computer for my son for school.

- I also received a 1098T for the total tuition.

When filing, I'm reporting the 1099Q that was in my son's name with his return.  I'm fine there.

However, when I try to add the other 1099Q under my return, along with the 1098T, to me it seems like TurboTax is assuming that the *entirety* of 1099Q is applicable to the amount shown in the 1098T, i.e. all qualified expense, when it is not.  I only intend for the fraction of the 1099Q which went to the computer purchase to be treated as a qualified expense, not the whole amount.  If the 1098T is not present, it treats the *entirety* of the 1099Q as an *unqualified* expense.

I realize there is a place for entering expenses like a computer purchase, which I have been doing from the start, but it seems to have no effect.  The same behavior as mentioned above occurs - the whole 1099Q amount is treated as unqualified if the 1098T is not there, and soon as it is added it considers the whole 1099Q as qualified.  As an aside -  I'm not eligible for Education Credits - and TurboTax correctly lets me know that.  I have no concern with that part.  I just want for the 1099Q amount to be recognized such that the amount used to purchase the computer is treated as a qualified education expense, with the rest of it treated as unqualified.

If you have any insight on how I would go about this it would be very much appreciated.

[Hal_Al · Accepted solution]

Since you are not claiming the tuition credit, you do not need to enter the 1098-T. 

You don't mention room & board (R&B). While R&B are not qualified expenses for the tuition credit, or tax free scholarship, R&B is a qualified expense for a 529 distribution, even if the student lives at home. 

Another thing to beware of: 529 money can be use for off campus living, but you are limited to the lesser of your actual costs or the school's "allowance for cost for attendance" . The student must be half time or more. 

If you continue to have problems getting TT to do it right, here's a workaround: Enter the 1099-Q. When asked who the student is, answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses, including R&B. Press Done at the 1099-Q summary screen, to get there. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. 

In addition to tax, the 10% penalty will apply to the non qualified portion of the earnings.

Example:
  $10,000 in educational expenses (including room & board which is only qualified for the 1099-Q)

  - $7,000 used on the student's return for his 1099-Q

 =$3000 Can be used against your 1099-Q 

 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 taxable income 

There is  $1120 of taxable income (on the recipient’s return)+ $112 penalty

Another thing to consider: the student's lower tax rate, although the kiddie tax will kick in early.  Make some of his distribution taxable, and less of yours.