1099 Qs Issued to Parent and Non-Dependent Student for 529 Scholarship Withdrawals

[Jmalibu]

I realized that I made a mistake as the 529 owner when completing non- qualified scholarship withdrawals. I’ve read through all the other posts, but my question is about claiming the tax on the earnings. 
I do NOT claim my student as a dependent on my tax return as they are over the age of 24, but we do provide all other living support outside of school expenses as they aren’t employed and go to graduate school full-time. I also do NOT claim any tuition expenses or education tax credits on my tax return (AGI doesn’t qualify to do so).
My student received GI bill assistance to pay for all tuition/fees/books and a room & board stipend.  The student will have additional taxable scholarship income ($2500) separate from the GI Bill scholarships and MUST file a tax return for that income and because they also have 1099B earnings.
For various reasons, it was in our best interest to complete two, separate 529 non-qualified scholarship withdrawals and received 2-1099Qs, however one has my SSN and the other has my student’s even though both of the withdrawals paid to their bank account. The one with my student’s SSN is correct and I will file as necessary on their return w/1098-T calculations, however the one with my SSN has box 6 “recipient not the beneficiary” checked. After speaking with the 529 plan, I learned I mistakenly selected paid to owner, rather than beneficiary when one of the withdrawals was made and the form cannot be corrected.

Therefore:

1. Do I need to claim my 1099Q Box2 earnings ($3244) portion as income on my return and pay the associated tax, as I won’t have any education expenses to offset?

2. If I must claim, how do I prove that this was for a scholarship withdrawal and not be required to pay a 10% penalty? (I know my student has enough GI bill scholarships paid to cover the amount withdrawn, but they will claim their own 1099Q w/1098T on their own return).

3. How do I enter these earnings, while stepping through TurboTax questions? Is there a way to manually add and where?

Thank you!

[Hal_Al]

Q1. Do I need to claim my 1099Q Box2 earnings ($3244) portion as income on my return and pay the associated tax, as I won’t have any education expenses to offset?

A1. Yes. As the recipient, you must report it. You cannot opt for the beneficiary to report it. 

Q2. If I must claim, how do I prove that this was for a scholarship withdrawal and not be required to pay a 10% penalty?

A2. You don't have to "prove it" at the time you file your tax return. You just say it's so, if your calculations show the student-beneficiary had enough scholarships for both 2099-Qs

Q3. How do I enter these earnings, while stepping through TurboTax questions? Is there a way to manually add and where?

A3.  You can make entries directly on form 5329 in the download versions of TurboTax (TT). But that will prevent you from e-filing. With the online versions, you have to use the interview.  But your situation is particularly easy in TT.  

Instead of entering the educational expenses in the education expenses section, enter it in the 1099-Q section of TT. When asked who is the student, check "someone else not listed here". On the next screen, enter the real student's name.  This will eventually give you one simple screen to enter all expenses. Press Done at the 1099-Q summary screen, to get there. 

After entering your expenses (of at least the amount box 1 of your 1099-Q), enter the same amount in the box “Tax Free Assistance”. TurboTax will prepare form 5329 to claim the penalty exception, for the scholarship and other assistance.

[KrisD15]

Additionally, to add to the answer above, I feel it is easiest to enter under 

Wages & Income

Scroll down to "Less Common Income" 

Scroll down to "Miscellaneous Income" and select START

Scroll down to "Coverdell ESA and 529 qualified tuition programs (Form 1099-Q)" and select START

No, not beneficiary

Yes received 1099-Q

Continue through this interview and enter the 1099-Q

On the "Form 1099-Q Summary" screen select Done (but you are not done) 

Continue through the interview until you get to the "Non-dependent student expenses" screen

Be sure to enter the amount of the tax-free assistance.

The tax-free assistance must be as much or more of the distribution 

You will be taxed on the earnings (Schedule 1 line 8z)

You will not have the penalty tax (check Schedule 2 line 8 )

[Hal_Al]

@KrisD15  is correct, since you have already determined that the distribution (and the 1099-Q) are taxable, to you, it is more intuitive to enter it in the income section, rather than the deductions & credits section.

That said, both entry points  will get you to the exact same interview.

1. Deductions & Credits / Education / ESA and 529 qualified tuition plans (Form 1099-Q)

or

2. Wages & Income / Less Common Income / Miscellaneous Income / Coverdell ESA and 529 qualified tuition programs (Form 1099-Q) 

[Jmalibu]

This is a bit of the twist to the original questions as I’m using TurboTax Online to also complete the student’s return.

How is this info entered for the student’s tax return for 1098T and 1099Q.  I’ve stepped through the 1099Q interview and entered the info two different ways.  One way results in the penalty tax being generated and the other is no tax due. I’m wondering if I need to outsmart TT online interview?

One of the questions in the 1099Q interview asks:

Who is the student? “Tell us the student whose education expenses were paid with the distribution reported on your 1099Q”

Answer Choices:

1. Student’s name (the tax return I’m doing and the person listed on 1099Q)

2. Someone else not listed

3. This distribution was not used to pay any education expenses

If I answer the #1 student’s name, no tax is due…but technically, this is a scholarship withdrawal to match a portion of the tax-free assistance they received.  We didn’t take the distribution $$ for expenses, but TT is matching up the distribution to other education expenses for books, computer, software, etc. and I’d like to see how the calculations were accomplished, so I know its correct.  The number generated for schedule 1, line 8z makes no sense. Also need to figure out if Form 5329 is generated (where can I see it?)

If I answer, #3-this distribution wasn’t used for any education expenses (which seems to be the “truth”), then TT online is generating a 10% penalty on the 529 scholarship withdrawal.  Doesn’t seem correct that I’d owe $424 federal tax on $988 of taxable income. Thank you for any and all assistance.  I thought I had this ready to go, but want to be sure it all makes sense before I file.

[Hal_Al]

Use "2. Someone else not listed" as described above,