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hegs
Level 1

429 Plan Withdrawal using Owner Name instead of Beneficiary

Hi, I made several withdrawals from my daughter's 429 plan for her college expenses but I chose myself (Account Owner) instead of her (Beneficiary) as to whom the funds should be sent to.  This triggered the 1099-Q Form to be sent to me and now the Earnings (Box 2) is being added to my income.  Is there any way to correct the Form.  The funds all went to pay for qualified education expenses so the withdrawal should be tax-free.

Thank you!

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SusanY1
Employee Tax Expert

429 Plan Withdrawal using Owner Name instead of Beneficiary

It is not a routine occurrence for the IRS to request proof that the 529 distribution was used on qualified expenses, and when the 1099-Q is entered with corresponding expenses nothing is actually transmitted with the return.  

 

Therefore, you're no more likely to hear from the IRS by not including it than if you did.  However, it's always possible that the IRS may request support for the use of the funds. 

Keep your documentation with your other tax documents for the year so you'll be ready on the off-chance they do ask, and maintain those records for at least three years.  

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6 Replies
Hal_Al
Level 15

429 Plan Withdrawal using Owner Name instead of Beneficiary

Q. Is there any way to correct the Form? 

A. No.

 

Q. The funds all went to pay for qualified education expenses so the withdrawal should be tax-free?

A. Correct. So, just don't enter it. 

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! 

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”.

______________________________________________________________________________________________

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 American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). 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 which is only qualified for the 1099-Q)

   -$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. 

KrisD15
Employee Tax Expert

429 Plan Withdrawal using Owner Name instead of Beneficiary

Form 1099-Q is sent to the Taxpayer that made the withdrawal from a 529 education savings plan. That Taxpayer is responsible for the tax, if there is any. 

 

IRS Pub 970 states that if the distribution was used for education expenses, don't report the 1099-Q.

HOWEVER you (and the student) do need to understand the ramifications of the distribution. If anyone applies for an Education Credit, they must reduce the expenses they claim by the amount of the distribution.

 

If you claim the student as a dependent, when you enter the 1099-Q into the TurboTax program, the program should ask what the distribution was used for, and if you select education expenses, it asks you to select who is the student from the people listed on your return. You would select the dependent student and continue to report the student's 1098-T to determine if you are eligible for an Education Credit. 

 

 

@hegs 

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hegs
Level 1

429 Plan Withdrawal using Owner Name instead of Beneficiary

thanks for the prompt answer!  If I don't enter the 1099-Q does the IRS request proof that the 529 distribution did get paid towards my daughter's education expenses?  I have all the documentation - just wondering if I need to look forward to a visit from the IRS?

 

SusanY1
Employee Tax Expert

429 Plan Withdrawal using Owner Name instead of Beneficiary

It is not a routine occurrence for the IRS to request proof that the 529 distribution was used on qualified expenses, and when the 1099-Q is entered with corresponding expenses nothing is actually transmitted with the return.  

 

Therefore, you're no more likely to hear from the IRS by not including it than if you did.  However, it's always possible that the IRS may request support for the use of the funds. 

Keep your documentation with your other tax documents for the year so you'll be ready on the off-chance they do ask, and maintain those records for at least three years.  

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
Hal_Al
Level 15

429 Plan Withdrawal using Owner Name instead of Beneficiary

Whether you do or don't enter the 1099-Q, in TurboTax, you have the same risk of hearing from the IRS, because when none of the distribution is taxable, TurboTax sends nothing to the IRS. 

 

At least two users have reported receiving a CP2000 letter, from the IRS, on 529 distributions. They replied that their child was in college and the distributions were for qualified expenses, which they listed, but they did not provide receipts.. They  later received a notices saying they were in the clear. Others have reported that just sending copies of school statements satisfied the IRS. We have noticed, here in this forum, that the number of 1099-Q notices, from the IRS has dropped off significantly in recent years.

hegs
Level 1

429 Plan Withdrawal using Owner Name instead of Beneficiary

thanks Hal.  I appreciate you taking the time to answer my questions.  I won't enter the 1099-Q information - I am a little worried that the IRS will wonder why I didn't enter it since they will also receive a copy of my 1099-Q but I have the documentation to prove that the entire distribution went to my daughter's education expenses.  

Thanks again.

 

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