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kanth
New Member

1099-Q woes.

Greetings. I received a 1099-Q. I took money out of my Blackrock 529, FBO:my son, for my son's college expenses. It was asked during the process if this was for school expenses. The payment from the 529 was made directly to me. I then in turn sent all of the money to the school by ACH transfer. The school, and blackrock themselves seemed to indicate this was the best route.

 

On the 1099-Q it lists me as the recipient, and box 6 is checked as I am not the designated beneficiary.

 

When I try to enter this 1099-Q into Turbotax, none of the questions seem to allow me to indicate that this withdrawal was for my son and college expenses for him were paid with it. In fact the tax I owe at the end shoots up by 5k. It basically seems to I guess think.. I took this money for myself?

 

How is this situation to be handled? I appreciate any response.

Thank you.

 

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4 Replies
DawnC
Employee Tax Expert

1099-Q woes.

If you know that the distributions from the 529 plan are not taxable because they were used on qualified expenses, do not enter the 1099-Q forms.  For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return.   Keep the form and associated education expenses with your tax records.

 

However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well.    Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants

 

For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000. Your adjusted expenses are $8,000—which means you don’t have to report any education program distributions on your tax return.

 

If the distribution doesn’t exceed the amount of the student's qualifying expenses, then you don't have to report any of the distribution as income on your tax return. If the distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return. When you pay a student’s school expenses with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense.

 

Room and board usually isn't considered a qualified education expense for the purpose of education credits.  The one exception is if room and board was paid for with a Coverdell ESA or 529 plan distribution. In that case, the cost can be deducted from the taxable part of the plan's distribution.

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Hal_Al
Level 15

1099-Q woes.

Educational expenses can be allocated to the 529 distribution, scholarships or the tuition credit, or maybe even cashed savings bonds. TurboTax (TT) makes certain assumptions about how those expenses will be allocated.  It's best if you have some idea of the outcome expected, when you make your entries. 

 

But, the 1099-Q is just an informational document. The numbers are not required to be entered onto your tax return.

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 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. You cannot double dip! 

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”.

__________________________________________________________________________________________

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 American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). 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 which is only qualified for the 1099-Q)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

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

 

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

 

**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. Most people come out better having the scholarship taxable before the 529 earnings. 

kanth
New Member

1099-Q woes.

So if I understand correctly.
My son had roughly these charges and scholarships.

 

Presidential ScholarshipF20612/4/23--$11,500.00
Tuition-EngineeringTEN112/4/23$20,900.00--
College of Engineering FeeCOFE12/4/23$350.00--
Founders Hall DoubleFH0212/4/23$3,300.00--
General Student FeeGENF12/4/23$550.00--
19 Meal Plan with $250 DiningMP1912/4/23$3,300.00--

 

 

My withdrawal from the 529 and then sent to the school for this semester from the 529 was $12,709.00.

All of that would be qualified expenses, because its certainly less than the tuition per sememster + the living fees as they are qualifying expenses correct?

In other words, I shouldn't put this 1099-Q form into turbotax at all?

 

Is that correct?

Hal_Al
Level 15

1099-Q woes.

Q. In other words, I shouldn't put this 1099-Q form into turbotax at all?

A. That's correct. 

 

And you have enough tuition expense left over to claim the American Opportunity Credit, if you  are otherwise eligible. You do not need to make any adjustments. 

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