1099-Q - Do I have to put the information on my taxes?

[Marcy17]

Do I need to put the 1099-Q information on my taxes? The education expenses are greater than the amount withdrawn, but TT keeps taxing part of my 529 distribution, even if I do not take an education credit (which they say is double dipping). I have tried to resolve this with them for years as it has always seemed to handle 529s incorrectly and I feel I have been ripped off for the last 9 years (3 kids).

[Hal_Al]

Q.  Do I need to put the 1099-Q information on my taxes? 

A.  No.

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. 

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." 

[Carl]

The qualified education expenses are tuition, books, and lab fees. That's it with no exceptions. Although the category for lab fees is rather broad.

First, scholarships/grants are applied to qualified education expenses. If anything is left over, then the excess is taxable income to the student; not the parent.

If after scholarships/grants are applied, or if there are no scholarships/grants, then 529 distributions are applied to the qualified education expenses. Additionally, 529 distributions can be used to pay for the unqualified but allowed expenses of room and board, provided that room and board was in direct support of the education. If there is anything left over then the excess 529 money is taxable income to the student; not the parent. One thing that can lead to confusion with 529 funds, is that the 529 distribution gets reported on the tax return of the individual whose SSN appears on the 1099-Q as the beneficiary recipient; be it the student or the parent.

Finally, out of pocket money is applied to any remaining qualified education expenses. Out of pocket money can not be claimed for room and board. Only for the qualified education expenses identified above.

In the end, if there is any left over funds from scholarships, grants and/or 529 distributions that are not used for qualified education expenses or R&B,  if that excess amount when added to the student's other earned income is less than $12,400, then it won't be taxed since the student gets the $12,400 standard deduction anyway.

When it comes to 529 funds, I always recommend folks go ahead and enter it into the TTX program. Then, if the program determines, based on all the data entered, that the 529 funds don't need to be reported to the IRS, then they won't be reported. But if questioned by the IRS a few years down the road you will have the necessary documentation in the PDF file of the tax return for the year in question, to help support your position of not reporting it.

[Marcy17]

I am well aware of what a 529 can be used for and how it must be used for education expenses to not be taxable. Also aware of scholarships influence on all that. I also understand the double dipping thing about education credit or tax.  I follow the TT through the questions and it NEVER handles this correctly. If I take an education credit it taxes some of the 529 distribution. If I tell it to not take an education credit on the forms themselves it STILL taxes the 529 distribution. Expenses are equal to or greater than distribution.

My questions is: if I know that expenses are greater than distribution, even with taking an education credit, do I have to put the 1099-Q on the tax return? Will the IRS be looking for this on the return? 

[Hal_Al]

Q. My questions is: if I know that expenses are greater than distribution, even with taking an education credit, do I have to put the 1099-Q on the tax return?

A. No. See above.

Q. Will the IRS be looking for this on the return? 

A. Yes & No.  TurboTax does a poor job.  But, the IRS also does a poor job: if you use all  your 529 money for qualified expenses, they don't make you fill out a form, showing that. By comparison, if you use all your HSA money for medical expenses, you have to fill out form 8889, to claim the exclusion.  There is no similar form for a 529 distribution.  So, there is no way for you to head off an IRS inquiry. 

So, yes, in the past, people (including me), here in the forum,  have reported getting a CP2000 letter, from the IRS,  on 529 distributions. At least two replied that their child was in college and the distributions were for qualified expenses, which they listed, but they did not provide receipts.. They  later received a notices saying they were in the clear. In my case, I provided copies of the school's billing statements.  I have noticed that there have been no reported cases lately.  It appears the IRS may have learned their lesson. 

[Marcy17]

Thank you! An excellent, thorough answer!

[taxTimeAlready_]

Hi all,

A variation question on this theme.

What I did:

1. My student's 2019 1098-T has her *spring 2020* tuition amount on it (because I paid her fees in December 2019).

2. I then submitted her entire 2019 1098-T expenses (ONLY TUITION) for reimbursement from the 529 in 2020.

What this resulted in:

1. The 2020 1098-T is lower than it should be.

2. The 1099-Q (to me) has a much larger amount - and has boxes 2 and 3 filled out.

My student has an off-campus apartment whose rent and expenses for 2020 (room and board) should easily cover the difference between the 1099-Q and 1098-T.

What TT is doing:

1. Even if I show expenses that clearly cover the entire amount on the 1099-Q, I am being charged ~$900 in taxes.  How do I go about resolving this?

Bottomline question: I can prove qualified expenses that cover the entire amount, do I have to enter the 1099-Q and beat my head against why I am being taxed?

Thank you all for your responses.

[Hal_Al]

Q. Do I have to enter the 1099-Q and beat my head against why I am being taxed?

A.  No.  And not entering (or deleting it) the 1099-Q is "how do you go about resolving this".

One caveat, if your student lives off campus, room and board expenses for a 529 distribution are limited to the lower of your actual expenses or the school's room and board allowance for on campus students. 

[taxTimeAlready_]

Thank you! Understood and I believe I have taken those into account. 

Regards.