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Vette23
Returning Member

1099Q distributions

hi.  I have two sons in college. Our oldest son receives a scholarship for tuition as a dependent of a university employee. Is this scholarship taxable? Also, he receives a 1099Q distribution to pay his off campus apartment and food...is this distribution claimed on our tax return as he is our dependent and does not have to file a tax return based on his income. He does however file a return only to receive a refund of his federal and state taxes.

 

Our youngest son receives a scholarship from his school which covers tuition, room and board. We cover student fees. On the 1098T, the school only reports the portion of the scholarship for qualified expenses. Are we supposed to report the remainder of the scholarship although it isn't mentioned anywhere? Also, we use a 529 distribution to pay his expenses and this year his distribution was used to calculate an education credit by turbo tax, should we do anything else?

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2 Replies
Hal_Al
Level 15

1099Q distributions

Q. Our oldest son receives a scholarship for tuition as a dependent of a university employee. Is this scholarship taxable?

A. No. Scholarships that pay for qualified expenses (e.g. tuition) are tax free.  if the "scholarship" is technically Tuition remission and/or  tuition waivers, they are also tax free. 

 

 

Q. Also, he receives a 1099Q distribution to pay his off campus apartment and food...is this distribution claimed on our tax return as he is our dependent? Or his return?

A. His dependent status is irrelevant. 

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, if it even gets reported. The recipient's name & SS# will be on the 1099-Q.

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." 

 

I'll post a separate reply for the questions for the younger son. 

Hal_Al
Level 15

1099Q distributions

Q. Our youngest son receives a scholarship from his school which covers tuition, room and board. On the 1098T, the school only reports the portion of the scholarship for qualified expenses. Are we supposed to report the remainder of the scholarship although it isn't mentioned anywhere?

A. Yes. After entering the 1098-T, on the student's return, you will be asked if there were any scholarships not shown on the 1098-T.  Enter  the R&B scholarship there.  You will then be asked how much of the grant was used for R&B.  Enter the R&B amount there. That will make it taxable.

 

Q.   We use a 529 distribution to pay his expenses and this year his distribution was used to calculate an education credit by turbo tax.

A. That's not exactly what happened.  TT assigned some of the tuition to claim the  education credit. That reduces the amount of qualified expenses available to keep the 529 distribution tax free. TT will calculate the taxable portion of the 529 plan distribution, also factoring in the tax free scholarship.

Q. Should we do anything else?

A. Yes. Be aware of the expected output.  The calculations are messy and TT frequently gets it wrong.

 

_________________________________________________________________________________________

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 (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. 

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