1ST YEAR COLLEGE STUDENTS

[raunam01]

Hello- My wife and I earned $162k last year. As I continued through the TURBOTAX program and after entering what we thought was all the correct info, it said we do not qualify for any tax breaks. We are putting twins through college and paid for the room and board, had some scholarships and borrowed the rest. We have not made payments on any loans yet. Are we in fact not eligible for a tax break? Did i enter the info wrong? should the 1099Q info and 1098T info be filled out on their tax return not ours? We cashed out a small Coverdell acct for each of them.

[ColeenD3]

Go back through your answers. The 1098-T should be entered first.

An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.

PUB 970

[Hal_Al]

I agree with ColeenD3, the interview is tricky.  You must follow it closely and have some idea of the expected output.  

There are three things you can do with your Qualified educational expenses (QEE):

1. Allocate then to scholarships (so that the scholarship remains tax free)
2. Use them to claim an education credit
3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, until you tell it otherwise.  If your don't have enough expenses to cover all three tax benefits, something will come up short.  

For the income limit ($180K), MAGI for most people is the amount of AGI, adjusted gross income, shown on your tax return. If you file Form 1040, you add the following amounts to your AGI:

• Foreign earned income exclusion,
• Foreign housing exclusion,
• Foreign housing deduction,
• Exclusion of income by bona fide residents of American Samoa, or of Puerto Rico.

• If you need to adjust your AGI to find your MAGI, there are worksheets in the Publication 970 PDF to help you.

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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 (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; 40% are taxable

40% x 600= $240

You have $240 of taxable income  

**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. 

[Hal_Al]

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1098-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B charge
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources

[raunam01]

I am the parent.

Box 1 1098T-  $5784.30

bob 5 1098t    $5000.00

no other scholarships

box 5 does not include any 529 payments

no mention of restricted tuition

Box 1 1099Q- $3568.31

Box 2 1099Q-  $0.0

Both names on the 1099Q- mine listed first then "for" my son but his ss#

Room and Board - $5117.14

Books $392.64  . got a new computer for high school graduation (does that count)

taxable income W2 a little over $5,000 from a job. 

this is all info for one of the twins. The info for the other is nearly identical with the exception of income. His brother had a job, then got laid off but collected unemployment

Thank you for your help

[Hal_Al]

Room and board is more than the amount in box 1 of the 1099-Q.  So none of the 1099-Q is taxable.  So delete the 1099-Q, it does not need to be entered. You're also spared the chore of calculating the earnings portion of the distribution (0 in box 2 does not, usually,  really mean 0)

Yes the computer counts since it was bought in the same year as college started. I'll use $800 for purposes of  the math.

  $5784  Tuition and fees

+  1193   Books and computers

= 6987     Total qualified expenses (room & board don't count for credits & tax free scholarship)

-   4000      Used by the parents to claim the American Opportunity Credit

=  2987     Can be covered by tax free scholarship

-   5000       Total Scholarship received

= $2013      Taxable scholarship to be reported by student on his return.  None will actually be taxed since his total income is less than $12,400 *

You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Enter the 1098-T, exactly as received, on the student's return. Enter book expenses separately.  In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.  

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount  in box 5. In that case be sure the amount in the  "Amount used to claim the tuition deduction or credit" box is 0.

*note: the student with unearned unemployment will not get a full $12,400 standard deduction.  But, reporting taxable scholarship is usually the best technique (instead of reporting some of the 1099-Q as taxable). The "kiddie tax" may kick in

[raunam01]

This is helping me a great deal thank you-

so when I visit the education portion, 1st question I answer is Yes I have a 1098T.

Do I answer no to being the beneficiary of a coverdell and no to receiving a 1099Q?

Then if I understand correctly I only enter to $4000 in box 1 and ignore any of the other boxes on my return.

Except box 8 (which is checked). Then do I enter other expenses on my return (books, computer  etc) on my return or his? 

Do I enter any of his scholarship info on my return

[raunam01]

Follow up on Education info

Hello-

I have been working on my taxes and did as you suggested 

You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Enter the 1098-T, exactly as received, on the student's return. Enter book expenses separately.  In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.  

It has left me with this question 

now that I have entered all the info on his filing, am I not allowed to enter any of the education expenses on mine? Is putting the $4000 from box 1 (on my form) enough to give me the deduction even though I have made no claim to additional expenses (on my form).

and somewhat related, we had to take advantage of the covid 401k withdraw and it put us above the $180k mark. Do we not qualify for the American Opportunity Credit

thank you for your help

[Hal_Al]

Q.  We had to take advantage of the covid 401k withdraw and it put us above the $180k mark. Do we not qualify for the American Opportunity Credit

A. Correct, you no longer qualify for the AOC because your income is too high.  I'm not aware of any exception for covid related 401k withdrawals and the AOC . You could enter in TT and see what it says. It should tell you you don't qualify.

But, that changes everything. Since you don't qualify for the AOC, your student has enough expenses for both the 1099-Q and his scholarship.  He should enter nothing about education on his tax return. No 1099-Q, no 1098-T.  None of his scholarship is taxable. None of the 1099-Q is taxable.

  $5784  Tuition and fees

+  1193   Books and computers

= 6987     Total qualified expenses (room & board don't count for credits & tax free scholarship)

-         0      Used by the parents to claim the American Opportunity Credit

=  6987     Can be covered by tax free scholarship

-   5000       Total Scholarship received

= $   0      Taxable scholarship 

Unfortunately, I had already answered all the other questions before I saw the 401k question.  So, I'll post those answers below for other users with similar situations.

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Q. So when I visit the education portion, 1st question I answer is Yes I have a 1098T?

A. Yes

Q. Do I answer no to being the beneficiary of a coverdell and no to receiving a 1099Q?

A.  Yes, essentially. You don't even enter the 1099-Q section, on either your return or the student's. If you already did, delete it.  The 1099-Q 

Q. Then if I understand correctly I only enter to $4000 in box 1 and ignore any of the other boxes on my return. 

A.  Yes.  Ignore only boxes that call for entering $ amounts  (yes  check  box 8).

Q. Then do I enter other expenses on my return (books, computer  etc) on my return?

A.  No

Q.  Do I enter any of his scholarship info on my return.

A.  No. Entering the $4000 in box one takes care of what you need (the AOTC and nothing else)

Q. now that I have entered all the info on his filing, am I not allowed to enter any of the education expenses on mine? Is putting the $4000 from box 1 (on my form) enough to give me the deduction even though I have made no claim to additional expenses (on my form).

A. Yes, putting the $4000 in box 1 gets you the maximum credit (something less than the $2500 max because of your income).  It's a tax credit , not a deduction

Q. Do I enter other expenses on my return (books, computer  etc) on the student's  return?

A. Yes, as previously instructed.

[raunam01]

Hal_Al- Thank you for all your answers. Despite us not qualifying for the AOC do I still enter the $4000 to generate form 8863 on my return? Do we bother mentioning the kids as students at all? You also suggest not entering anything about education on his return. Does that mean not even mention him as a student? Won't we have to enter something (on someones return) regarding the forms sent to the IRS like the 1098T and the 1099Q. Would his return be any different if I entered the expenses and associated college info on his return?

[Hal_Al]

Q. Despite us not qualifying for the AOC do I still enter the $4000 to generate form 8863 on my return?

A. No. form 8863 is only submitted if you ARE claiming a tuition  credit.  Entering unused info, in Turbotax, puts nothing on the actual IRS forms. You're wasting your time and just opening up opportunities for mistakes.

Q. Do we bother mentioning the kids as students at all?

A.  Yes, in TT, but only in the personal info section to qualify them as dependents.  Enter nothing in the education section.

Q. You also suggest not entering anything about education on his return. Does that mean not even mention him as a student?

A. As on your return, you do indicate, in the personal info section that he is a dependent.  List his "occupation" as student-dependent.  Don't enter anything in the education section.

Q. Won't we have to enter something (on someones return) regarding the forms sent to the IRS like the 1098T and the 1099Q.

A. No. The 1098-T and 1099-Q are only  informational documents. The numbers on them are not required to be entered onto your tax return. Entering them in TT, in you situation, puts nothing in any IRS forms for your returns.

Q. Would his return be any different if I entered the expenses and associated college info on his return?

A.  No. Again, nothing goes on the tax forms as a result of entering educational info that has not results (no credit, no taxable scholarship and no taxable  part of the 1099-Q)