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Tripmom
Returning Member

1099Q, 1098T, American Opportunity and Lifetime Learning

I have 3 undergrad college students, I claim all as dependents.  Each files their own returns as well for limited summer job income.  529s for all three.  Expenses exceed the 529 distributions for each. However, if I put all Q's and T's on my return, I do not qualify for any credits of any kind so nobody is getting any chance at the Amer. Opp or Lifetime Learning credits.  Is there a better way to do this so the students can benefit?  

Some entries I read seemed to say I should ignore the 1099Qs and put the 1098Ts on my student's returns. I'm very confused.  What do you recommend?  Thank you for your help! 

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6 Replies
Hal_Al
Level 15

1099Q, 1098T, American Opportunity and Lifetime Learning

Q.  Some entries I read seemed to say I should ignore the 1099Qs and put the 1098Ts on my student's returns.

A. Yes, to ignoring the 1099-Q.  No, to putting the 1098-T on the student's 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! 

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." 

 

Ignoring the 1099-Q assumes you have enough expenses left over to claim the American Opportunity Credit (AOC).  When you enter the 1098-T, later, you have to reduce the amount of expenses you use, by the amount claimed for the 1099-Q.  Room and board are qualified expenses for the 1099-Q, but not the AOC.

Provide the following info for more specific help (give me only one student's info, you should be able to use my answer as a template for the  others):

  • Are you the student or parent.
  • Is the  student  the parent's dependent.
  • Box 1 of the 1098-T
  • box 5 of the 1098-T
  • Any other scholarships not shown in box 5
  • Does box 5 include any of the 529/ESA plan payments (it should not)
  • Is any of the Scholarship restricted; i.e. it must be used for tuition
  • Box 1 of the 1099-Q
  • Box 2 of the 1099-Q
  • Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
  • Room & board paid. If student lives off campus, what is school's R&B charge. If the student lives at home, only the school's board charge for on campus students. 
  • Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
  • How much taxable income does the student have, from what sources
  • Are you trying to claim the tuition credit (are you eligible)?
  • Is the student an undergrad or grad student?

Q. Is there a better way to do this so the students can benefit?  

A. No.  Dependents are not allowed the refundable portion of the AOC.  With "limited summer jobs" they would not have a tax liability to benefit from the nonrefundable credit. In addition, you would have to forgo the $500 other dependent credit, to allow them to do so. 

_____________________________________________________________________________________

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 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)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’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

You have $1120 of taxable income  

 

**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. 

1099Q, 1098T, American Opportunity and Lifetime Learning

Tripmom,

 

I infer your AGI is above the limit for claiming AOC for your dependents.  You can, indeed, not claim a dependent and have the difference between their total qualified educational expenses and that portion of them paid with the 529, i.e. tuition and books mostly, used by the student to claim any nonrefundable portion of their credit.  Be sure to apportion as much as possible of the 529 distribution towards the room and board and related expenses.  (See IRS publication 970 https://www.irs.gov/pub/irs-pdf/p970.pdf ) for that info.)  Then see if that decreases the student's tax more than it increase your own.  If so, rinse and repeat.

Tripmom
Returning Member

1099Q, 1098T, American Opportunity and Lifetime Learning

I am the parent.  The students are my dependents. I have 3 students, all undergrad.

In only case is there any amount in box 5 and it is a couple so we will do that case as the example.

In all 3 cases, the 1098Ts and actual expenses exceed the amounts in the box 1 1099Qs.

1098T box 1 = $19,632.00

1098T box 5 = $358.45

no other scholarships

Box 5 does not include any 529

Yes, that "scholarship" is an employee discount on the tuition I get from my employer at the school

1099Q box 1 = $19,318.56

1099Q box 2 = $9,210.66

1099Q recipient is FBO student and parent "part" but SS# is parent.

Student lives at home.

Other qualified expenses = $180.18  (books, we just feed and house all)

Minimal cap gains and interest income in 2021.

We did not qualify due to income level for any credits.

Student is undergrad.

 

This case would be similar for the other 2 students.  1 student has govt loans but have not started paying back, another needed to file to recoup withheld taxes.

 

Tripmom
Returning Member

1099Q, 1098T, American Opportunity and Lifetime Learning

Thank you for the link to this very helpful publication and for your guidance! 

Hal_Al
Level 15

1099Q, 1098T, American Opportunity and Lifetime Learning

Because you cannot claim a tuition credit, you situation is simple: don't enter either the 1099-Q or the 1098-T, on your return or the student's return.  There's nothing to report. 

 

The 1099-Q and the  1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.

 

 

Tripmom
Returning Member

1099Q, 1098T, American Opportunity and Lifetime Learning

Best news all day.  I am so grateful, thank you.

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