I made qualified distribution from state 529 tuition plan. Because my child received a scholarship and I am getting a partial American Opportunity credit of $1,000.00, turbo tax is calculating taxable income of $309.00 to her. I trust Turbo is calculating correctly but to me, nothing should be taxable with all the college expenses I had to pay. But let me get back on subject. This is her ONLY income. Is she required to file tax return for this taxable 529 distribution? Again the amount is $309.00. Do I have to include this income on 5329T for it to be taxed at parents rate? Or do I nor she do nothing with this?
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It's complicated. Her only income of $309 unearned is not taxable since it is less than the $1100 filing requirement, so technically she does not need to file a tax return. But, technically she is suppose to file form 5329 to claim the penalty exception (scholarship exception). A form 5329-T can be filed alone; it does not have to be filed with form 1040. This assumes she was the recipient of the 1099-Q, not you.
You say "to me, nothing should be taxable with all the college expenses I had to pay". You may be right. TurboTax gets this wrong frequently. If you're confident you're right, just don't enter the 1099-Q*, particularly since nothing is owed even if you're wrong.
Provide the following info for more specific help:
*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!
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