in Education
I am a grandparent who has a 529 account for a grandchild. I have taken distributions from the 529 account for the last four years to help pay for qualified education expenses. I make my payments directly to the college so they always equal or exceed the distribution so I have good record keeping of where the distribution goes. I am the recipient and the grandchild is the beneficiary. In 2021-2023 I always entered the 1099-Q in TurboTax and it never affected the amount of federal tax I had to pay. Now I have the 2024 TurboTax program and I am entering the 1099-Q as I have for the last three years, but now it is making some of the distribution taxable and increasing my federal tax. The grandchild is not my dependent so I can’t enter expenses to offset the distribution. I have talked to Tech Support and had the live online support that I paid extra for. No one can explain why the program is doing what it is this year and the best advice I got was to not enter the 1099-Q on my tax form. This is an option, I guess, but why did it never have an effect before and this year’s program is doing something different? Help is appreciated.
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As long as all the distributions go to qualified expenses, just don't enter it going forward. As you said, you have good records if you ever hear from the IRS (unlikely).
That said, I did test on my desktop (download) Deluxe. It worked fine. It's actually easier, in your situation, where the student is not your dependent. After entering the 1099-Q, you are asked who the student is answer: someone else not listed here. Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there.
You don't say whether the parents are eligible for a tuition credit. It's a "big deal" if they are.
If all of the distribution was used for qualified education expenses do not report the 1099-Q.
You said " I make my payments directly to the college so they always equal or exceed the distribution so I have good record keeping of where the distribution goes. I am the recipient and the grandchild is the beneficiary." That's actually not correct. When the money goes directly from the 529 to the school, the student-beneficiary is the recipient.
But, either way, 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:
If you insist on entering it (and you really shouldn't) delete the 1099-Q and anything you entered in the educational expenses section and start over. It's actually easier in your case (the student is not your dependent) because it can all be entered in the 1099-Q section (enter nothing in the 1098-T section).
Even though the student's expenses were paid by 529 plan, it is still possible for the parents to claim the generous tuition credit, if their income is not too high ($90K, $180K married). They can even amend back returns. Read on for details.
_____________________________________________________________________________________________
Qualified Tuition Plans (QTP 529 Plans) Distributions
General Discussion
It’s complicated.
For 529 plans, there is an “owner” (usually the parent but can be a grandparent), 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.
The parents can and (usually) 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 regardless of whose money was used to pay 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. A student, with no other income, can have up to $14,600 of taxable scholarship (in 2024) and still pay no income tax.
I want to thank everyone for their extensive and very thoughtful responses. Just as an FYI. The 1099-Q distribution comes directly to my bank account and I pay the college directly. For this reason, I am the recipient and my granddaughter is the beneficiary. I have a paper trail of the money coming in and going directly to the school for qualified expenses. Since my granddaughter is not my dependent, I cannot add 1098-T data to my return on her. I think it is for this reason that TurboTax for 2024 is calculating a portion of the 1099-Q distribution as taxable on my return. I will just delete the 1099-Q as I have records that my payments to the college are fully covered by qualified expenses.
I guess the interesting part is that I have entered the 1099-Q every year in TurboTax without entering any 1098-T data in “Education Expenses” and my Federal Tax was never affected. The amount owed was the same whether I entered the 1099-Q or not. Whatever was changed in the program for 2024 is a mystery that TurboTax cannot explain to me and how the approximately $1000 increase in Federal Tax is calculated also cannot be explained.
In the end, I will just delete the 1099-Q and move on. The bad part is that I have a grandson that started college last year so I have to deal with two 1099-Q and I have five more grandchildren in line to go to college in the future so I will be dealing with this for a decade. Guess it is what we get for being helpful. Thanks to everyone.
As long as all the distributions go to qualified expenses, just don't enter it going forward. As you said, you have good records if you ever hear from the IRS (unlikely).
That said, I did test on my desktop (download) Deluxe. It worked fine. It's actually easier, in your situation, where the student is not your dependent. After entering the 1099-Q, you are asked who the student is answer: someone else not listed here. Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there.
You don't say whether the parents are eligible for a tuition credit. It's a "big deal" if they are.
Your advice helped and it worked perfectly. Thanks for your assistance.
Your answer was so simple, but totally correct. Just hit “Done” after you have entered all the 1099-Q and then you can add what you paid for qualified expenses and results, no taxable income on those distributions. I was just being stupid and didn’t hit done. The good news is you gave better advice then the live professionals at TurboTax and their tech support combined. Thanks again to everyone.
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