I find it goes better if you enter the 1099-Q (529 distribution) first, Then enter the 1098-T (educational expenses). For example TurboTax will not give you the room & board entry boxes if you enter the 1098-T first.
Room and board are qualified expenses for a 529 withdrawal, but not for the education credit. If you first apply the 529 distribution (withdrawal ) to room and board, that frees up more of the tuition to be claimed for the tuition credit. This happens automatically in TurboTax, as long as you enter your room and board expenses. The income limit for claiming the American opportunity Credit is $180,000 (married filing jointly).
You enter the 1099-Q on your return because you are the "recipient". You enter the 1098-T on your return because the student is your dependent.
529 distributions are never shown on the 1098-T, even when the money goes directly the school.
Q. "I have heard people talk about allowing their child to enter it in their tax return to help them qualify for a stimulus payment. Is that doable?
A. No. If the student qualifies as your dependent, whether you actually claim him or not, he does not qualify for a stimulus payment.
Once the distribution is sent to you (and the 1099-Q issued in your name) he cannot report the distribution on his return. When you make the distribution, you can elect to have it sent to him and any taxable part is his income (you have no taxable part this year). But, even though it's his income it still counts as support from you since you are the owner. He cannot claim to be self supporting for the dependency support test.
_____________________________________________________________________________
More on 529 plan distributions
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 $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
**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.
