1099-Q Form

[PenelopeKR]

Hello,

I'm listed as a recipient on Form 1099-Q. The total amount in box 1: gross distribution was used to pay my daughters tuition (not more not less). The funds came from her 520 plan. When I put in the 1099-Q amount into turbo tax 2024 (box 1, 2, 3), I am automatically taxed for the earnings amount. Last year when I put in the data I was not taxed. Did something change in turbo tax this year? I know that if the distribution amount was used for educational purposes, I should not be paying tax on the earnings. My daughter is a full time 4.0 student. Can I just omit this form on my taxes this year? I don't want to be raise any red flags with the IRS and be audited. Also, not sure if this makes a difference, but both years I am not able to get tuition credit that was sent on Form 1098-T because my income is more that $180K.

Thank you so much to who ever responds to my message.

Best,

Penelope

[AmyC]

When the Q is fully used, it ends up not going on your actual tax forms. Please do not report it but do tuck it into your tax folder with the supporting documents.

IRS Pub 970 states: Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return.

The  529 can be used towards 529 qualified Room and Board  to free up money for AOTC credit -if you qualify.   You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

[PenelopeKR]

Thank you Amy for your quick response. I will not report the 1099-Q in this years tax return but rather save it my tax folder just in case the IRS has any questions. 

Do you know why Turbo Tax automatically taxed me on the earnings portion of the 1099-Q. This was not the case in prior years.

Best,

Penelope

[AmyC]

You have to enter the forms in a particular order and then answer the questions just so. The program prefers to highjack $10,000 for the lifetime credit. I am not a programmer, I just know the best way to file correctly. 

Since the IRS says not to report the form, that is perfect. I think that is part of the program issue, you are not expected to enter a form that isn't taxable so the program is working to make it taxable.

[Hal_Al]

Q. Do you know why Turbo Tax automatically taxed me on the earnings portion of the 1099-Q?

A. You did not enter the offsetting expenses correctly and/or the educational info.

Confirming AmyC's reply: just don't enter the 1099-Q (or the 1098-T). 

 The 1099-Q (and the 1098-T) is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you can. 

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 don’t need it).  You also cannot count expenses that were paid by tax free scholarships.

References:

1. 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." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
3. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 

Q. Does it make a difference if I am not able to get tuition credit that was sent on Form 1098-T because my income is more that $180K.

A.  Technically, No.  But that reinforces the likelihood that none of the 529 distribution is taxable, since none of the   expenses will be needed for the tax credit.