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bja7
Level 2

1099Q Tax Earnings Issue

I am the father of a child who is a 2nd year student at a university.  I have the 529 money sent to me and I pay the university fees.  The 1099Q form was sent to me.  Am I responsible for the taxes on the earnings?  I'm not sure how to handle this situation.  Please help.  Thanks, Ben

8 Replies
Hal_Al
Level 15

1099Q Tax Earnings Issue

Yes and No.

Because the 1099-Q is in your name and SS#, you are responsible for any tax due.  But, if the distribution was totally used for qualified expenses, including room and board, there will be no tax.  But, there is a situation where you may want to pay a little tax, to qualify for a tuition credit.  Read on for details, and options for future years. 

 

Qualified Tuition Plans  (QTP 529 Plans)

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 $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.

 ***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.

 

bja7
Level 2

1099Q Tax Earnings Issue

Hello,  I added my 1099Q information and noted my son as the beneficiary.  Turbo Tax notes my Tuition and Fees as $0 because my AGI is greater than $180K.  This doesn't allow me to input the 1099-T information which represents the amount drawn from my son's 529 plan to pay tuition and fees.  Any thoughts?  Much appreciated.  

Hal_Al
Level 15

1099Q Tax Earnings Issue

if the amount in box 1 of the 1099-Q is less than or equal to all your qualified expenses (including R&B), just don't enter the 1099-Q,  at all. You have already determined that none of it is taxable.

 

That said, I have never heard of TT not allowing you to enter the 1098-T because your income is too high.  If you insist on jumping thru the TT hoops, try this: 

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to the section you want to change; tuition, in your case.

bja7
Level 2

1099Q Tax Earnings Issue

Thanks.  I removed the 1099Q info since expenses were less than the information reported on the 1099Q

BuckMurdock
Level 1

1099Q Tax Earnings Issue

My now non-dependent son graduated college last year and is working.  We already filed his taxes, using the 1099-Q (in our name with him as beneficiary) and 1098-T (in his name).  Since his expenses were more than the 1099-Q amount he received a partial lifelong learning credit which we are not eligible for.  This seemed like a good idea at the time.  

In past years we always used the 1099-Q on our return.

I am doing our taxes now and it seems like I need to use the 1099-Q and 1098-T but I cannot because he already used it. 

Is this a problem? Can I enter them on our return?  All I need to do is offset the 1099-Q amount.

Thanks.

 

Hal_Al
Level 15

1099Q Tax Earnings Issue

@BuckMurdock 

Do not enter either the 1099-Q or 1098-T on your return, because he is no longer your dependent.   They have already been reported on his return.  Furthermore, both forms are only informational documents. There is no requirement that they be reported*.

 

That answer assumes that there were sufficient expenses, including room and board, to cover both the 1099-Q and the LLC (Lifetime credit), on his return.  That is, no portion of the 1099-Q (box 2 amount) was taxable on his return.

 

*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."  Even when entered, 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.  So, even if the 1099-Q was suppose to be enter on your return, instead of your son's; it doesn't matter. Nothing was sent to the IRS. 

 

Information only (the above answer still stands): 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 needs to be reported).The recipient's name & SS# will be on the 1099-Q.

 

 

BuckMurdock
Level 1

1099Q Tax Earnings Issue

Thanks for the detailed response.  I thought this was the case but the instructions are very confusing, especially in this special case where we paid the expenses and he became a non-dependent. 

We had more than enough expenses to cover the withdrawal so that's not an issue.

 

NCperson
Level 15

1099Q Tax Earnings Issue

@bja7 - did you type that incorrectly?.... you can remove the 1099Q if the expenses are GREATER than Box 1 of form 1099Q.  if the expenses are LOWER, then there is a tax consequence. 

 

Expenses = 1099T (Box 1) minus 1099T (Box 5) PLUS other qualified expenses (think Room and Board, books not already on the 1099T and computer related expenses).

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