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adkroken
Returning Member

1099-Q form

Hi,

 

My daughter took $500 out of her 529 plan for the first time this year for approved expenses. The payment went directly to her. We are filing her taxes and input her 1099Q form but now we are getting a notification on her return that we need to fill out form 5329. I've never had that before with my other kids. Why are we having to fill out the 5329 form because of her 1099Q?

 

I tested her return to make sure that is what was causing the extra from to be required. If I deleted her Q form we were able to submit her return with no issues. 

 

Thanks

August

4 Replies
ColeenD3
Expert Alumni

1099-Q form

Have you entered the Form 1098-T? The program needs to connect the distribution with the expenses.

 

Here's how to get to the 1098-T screen if you haven't visited the Education section yet:

  1. Open (continue) your return, if you don't already have it open.
  2. Search for 1098t and select the Jump to link at the top of your search results.
  3. On the Do you want to enter your higher education expenses? screen, answer Yes.
  4. Answer Yes to Did you get a 1098-T for the year? and Continue.
  5. On the next screen, you can choose how you'd like to add your 1098-T. You can upload a digital copy from your computer or type it in yourself. Select which option you'd like and Continue.

From the Education Expenses Summary screen you can:

  • Select Add A Student if you need to enter a 1098-T for someone else (and then resume steps 4 and 5 above); or
  • Select Edit to revisit the 1098-T for a previously-entered school or Add New School to enter a new 1098-T.

Some important tips about entering this form:

  • Parents: If the student listed on the 1098-T is your dependent, enter the 1098-T on your return – even if your dependent paid the tuition.
  • Students: If you're not being claimed as a dependent, you can enter the 1098-T on your return regardless of who paid the tuition unless it was your employer. In that case, just keep the 1098-T with your tax records.
  • Enter your 1098-T exactly as is even if the amounts are wrong (this is common). You'll get a chance to correct this info and enter additional expenses later in the Education interview.
  • Leave blank boxes blank. Don't enter 0 for any blank boxes on the form, as this generates errors.
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Hal_Al
Level 15

1099-Q form

Simply delete the 1099-Q.  When used for qualified expenses, it does not need to be reported. 

 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." 

 

Form 5329 is used to calculate the 10% penalty, or claim an exception to the penalty, when a portion of the distribution is taxable.

 

If you do enter the 1099-Q, you must also enter the education expenses.  Even though you may have used the distribution for qualified expenses, you cannot claim the same expenses for a tuition credit or tax free scholarship (double dipping").  Most likely, you just have a data entry error.

Hal_Al
Level 15

1099-Q form

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 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 even though it was "his" money that paid 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)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

 

**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.

adkroken
Returning Member

1099-Q form

 
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