Q.How do we correct this in filing?
A. Just don't enter the 1099-Q.*
Technically, a 529 distribution must occur in the same year the expenses were paid. This problem, of mismatched year end distributions, is fairly common. Treat it as received and paid in the same year. And hope you can explain it away if you receive an IRS notice. You certainly meet the intent of the 529 rules, if not the strict letter. We haven't seen any reports, in this forum, of how that specific problem has actually worked out.
Do a better job on timing next year
Several users, in the distant past, have reported receiving a CP2000 letter, from the IRS, on unreported 529 distributions. They replied that their child was in college and the distributions were used for qualified expenses, which they listed, but they did not provide receipts. Others have reported just sending copies of the school's billing statements. They later received a notices saying they were in the clear. I've noticed a significant drop (none that I have actually seen) in users, here, reporting IRS notices about 1099-Qs, in the last few years.
*The 1099-Q 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 probably 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 would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships.
References:
- 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."
- 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”.
- "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."
