1099-Q tax questions

[mimi5700]

I have accidentally withdrawn a wrong amount from my son's 529 plan to my bank account and then later put transferred the full amount back within 60 days to the original 529 plan.  I then later withdrew the right amount from my son's 529 plan to his bank account to pay for his tuition.  I got one 1099-Q under my name and one 1099-Q under my son's name. 

Q1: Since the first withdrawal was put back to the original account immediately, it shouldn't incur any tax or penalty; however, I still got the 1099 -Q under my name, how do I deal with it when doing the tax return?  Q2:  The 2nd 1099-Q was under my son's name.  Should I file it under my tax return?  We are eligible to claim for the American Opportunity credit.  By the way, my son didn't have any income to file for any tax return.  

Thanks for your help! 

[ThomasM125]

You need to enter the 1099-Q that was in your name on your tax return. When you do so, you will be asked if you rolled it over within 60 days to another qualified tuition plan, to which you will answer "yes."

Assuming the money withdrawn from the education savings plan was used for qualifying education expenses not used on your tax return to qualify for an education credit or associated room and board, your son would not have to file a tax return to report it. Otherwise, he would be the one who reports the form 1099-Q that is issued under his name.

@mimi5700 [Edited 2/15/22 at 12:52 PM PST]

[mimi5700]

Hi, Thomas

Thanks for your reply!  Just to clarify,

For Q1, the full amount on the 1099-Q in my name was rolled back to my son's original qualified tuition plan, could I still answer "yes" ?

For Q2, I will file the 1099-Q in my son's name on my tax return as the full amount was used for qualifying education expenses.

[ThomasM125]

You can make one tax-free rollover to a member of your family each year. So, assuming you qualify you should enter "yes" to the rollover question.

You are not required to enter the 1099-Q on your tax return since it is not in your name. To the extent you use the education expenses on your tax return to qualify for an education credit, you can't also use them to exempt income on your 529 plan withdrawal. However, you can use room and board as qualifying expenses for your 529 plan withdrawal, as they are not allowed for the education credit.

Even though not required, you can enter the form 1099-Q on your tax return to see if the income is taxable. If you find it is, if it is under $1,100 then your son does not need to file a tax return, as that is the standard deduction for dependent unearned income. Otherwise, you should file a return for him and enter the form 1099-Q and his room and board expenses in the education section to see if he needs to file and pay tax on the 529 plan income. 

[mimi5700]

Hi, Thomas

I think I am still a little confused.  Just want to confirm that I did it correctly.  In my tax return, I entered the 1099-Q amount which is in his name and then his college's 1098-T, and I got the full credit $2500 for American Opportunity Credit. 

What I did to come up with the amount to withdraw from my son's 529 plan was to subtract $4000 out of the total qualified expense to make sure I can get the full AOC credit without incurring any tax.  $4000 was paid from my own bank account instead rather than from the 529 plan.  So the 1099-Q in my son's name was actually $4065 below the qualifying expenses including room and board.

Thanks!

[AmyC]

Yes. Since the 1099-Q was used for qualified expenses, it is not necessary to enter the form at all. Yes, having $4k or more left for you to pay is ideal for maximizing the AOTC. The 1099-Q also goes towards room and board which leaves more room. Usually room and board will be more than that.

See page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education &  Guide to IRS Form 1099-Q: Payments from Qualified Education Programs. 

[mimi57001]

Thanks Amy and Thomas!  But how do I show on my state form that the first 1099-Q amount was transferred back to a qualified plan within 60 days so I don't get tax and penalty.  On MN tax form, it asks that you enter all the distribution amount and the amount not used for education.  When I enter both amount, and only the amount not used for qualified expense, I was taxed for the portion distributed but not used for education even though it was transferred back to a qualified plan right away.  Should I enter 0 for the amount not used for qualified expenses instead since it shouldn't get taxed?  Thanks!

[ThomasM125]

Yes, you should enter $0 for the amount not used for qualifying expenses. Since you rolled over the excess, you were in compliance with the tax laws with regard to not using the distribution for non-qualifying expenses.

[mimi57001]

Thanks Thomas!  So should I enter just the 2nd withdrawal (since the first withdrawal was transferred back right away) as the total distribution amount?  

[DianeW777]

Yes. It's pretty clear that none of your distribution is taxable, just don't enter the 1099-Q on your return for the one that was rolled back into the 529 plan. Keep your records with your tax return and the statement showing the roll back should the IRS question you later.

[mimi57001]

Thanks so much everyone for your great assistance in clarifying my questions!