1099Q taxable portion of earnings

[Camille 2024]

Thank you in advance for your assistance.

I'm thoroughly stumped with the 1099 Q and 1098 T. I am receiving the AOTC credit of $2500 but when I query the 1099Q and enter the info, TT says that a portion of my daughters 529 earnings are taxable income to her. I will provide actual numbers so an expert can hopefully help me:

Total tuition, room and board, books and supplies that we paid in 2024 were: $42,219

1098T

Box 1 - $59,152 (this does not include room and board and supplies, it also include scholarships & aid)

Box 5 - $35,315

Box 7 - checked

1099Q

Box 1 - $32,628

Box 2 - $4,467

Ideally, I'd like to ignore the 1099Q since we paid almost $9600 over the amount we had the 529 reimburse. This would cover the $4000 which goes to the AOTC. I think the scholarships are what's confusing me...are scholarships and university aid taxable? I don't think we are "double dipping". Depending on this years outcome, we may need to file a 2023 return for my daughter if it turns out she had some of the 529 earnings be taxable for last year. 

Happy tax season! 

[Hal_Al]

Yes, just don't report the 1099-Q.*  The TT interview is complicated and mistakes are easy to make. 

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 (and you've done this already).  

References:

1. 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." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

** I took  "Total tuition, room and board, books and supplies that we paid in 2024 were: $42,219" to mean over and above the 35,325 scholarship.  42219 - 4000 (for the AOTC) = $38,219 Qualified expenses for the 529 distribution. $38,219 is more than the $32,628 distribution. None of it is taxable or reportable.