You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board to cover the distribution. That is, none of the "earnings" (not earned income), in box 2, will be taxable. 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 cannot double dip!
When the box 1 amount on form 1099-Q is fully covered by expenses, and your correctly enter your educational 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.
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."
More on 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.
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 received a 1099Q. The recipient is my son (age 20). I am the sponsor. I entered the1099Q box # 1 distribution (around $50,000) onto my son TT tax return. The entire 2020 1099Q distribution amount was his university tuition or college qualified expense. We did not withdraw any excess amount over his qualified college expense. My son has no other income except some small interest & dividend. I am also claiming him as dependent on our married filed joint tax return.
My question is why I need to pay tax on his 529 distribution? I am showing approx $8k taxable income from 529 that trigger approx $400 federal tax. I thought 529 distribution on college expense is tax free.
I am hoping someone can shed some light on this?
Thanks
I am having trouble locating where I would enter the room and board expenses?
To get o the R&B screen, answer yes when asked if you have book expenses.
You may have to first enter a 1099-Q to generate the room & board (R&B) screen. R&B is not a qualified expense for a tuition credit or deduction but is for a 529/ESA distribution (reported on a 1099-Q)
If you are confident on the math that your 1099-Q distribution is less than or equal to valid 529 expenses, is there any benefit in putting the 1098-T and the 1099-Q forms into TurboTax?
To confirm: The only reason to enter the 1099-Q (and possible associated 1098-T) would be if you actually do have to pay taxes on the 529 distribution?
Q. If you are confident on the math that your 1099-Q distribution is less than or equal to valid 529 expenses, is there any benefit in putting the 1098-T and the 1099-Q forms into TurboTax?
A. Simple answer: No TT will prepare a work sheet showing how it got to none of it taxable, But that's info you already know: add up your expenses, subtract amount claimed for a tuition credit, subtract amount covered by tax free scholarship. If the net amount is more than the distribution, none of the distribution is taxable.
Q. To confirm: The only reason to enter the 1099-Q (and possible associated 1098-T) would be if you actually do have to pay taxes on the 529 distribution?
A. Yes.
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.
At least two users, here in the forum, 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. A third reported that he just sent a copy of the school's billing statement and was cleared.
I had the 529 distribution paid to me (parent) and then I paid the university.
The 1099Q shows me as the recipient. The total payment minus education credit was well above the distribution amount. If I enter the 1099Q into TT and choose myself as "Who is shown as the recipient" TT makes the amount taxable. If I choose my son it is not taxable. To my knowledge I should not be paying any tax here but it seems TT is not really making it clear given the information I have.
You've entered something wrong, if a taxable amount is being calculated.
Your situation is the same as the previous poster: you know none of it is taxable, so just don't enter the 1099-Q.
Ok not sure why TT doesn't account for this or provide a way to say that expenses were greater than distributions. To get to this point TT does explicitly ask if I received a 1099Q. I guess answer "no" even though I did?
Q. To get to this point TT does explicitly ask if I received a 1099Q. I guess answer "no" even though I did?
A. Yes, answer no. If you've already entered it, click delete at the 1099-Q summary screen.
Same exact issue as BigDad930. Hoping TT chimes in to assist
Q. The entire 2020 1099Q distribution amount was for his university tuition or college qualified expense. We did not withdraw any excess amount over his qualified college expense. My question is why I need to pay tax on his 529 distribution? I thought 529 distribution on college expense is tax free.
A. Yes, if the distribution was totally covered by expenses, none of it is taxable; as long as you didn't use some of those expenses to claim some other tax benefit.
So, since it's not taxable, just don't enter the 1099-Q. The 1099-Q is just an informational document, the numbers are not required to be entered on your tax return. In fact, 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.
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."
So, you might ask: why doesn't TurboTax figure that out?
There are three things you can do with your Qualified educational expenses (QEE):
TurboTax allocates QEE, in that order, until you tell it otherwise.
One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q, as being totally tax free. 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 “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it. You may reach that screen sooner.
Another possibility is that you had scholarships that TurboTax allocated some of the expenses to.
If the student is your dependent, list the student on your TurboTax program and enter all the related documents (1098-T and 1099-Q) so that your program can do the math.
If there is taxable income, your program will tell you how much income the student needs to claim on their return (if any).
If there is an education credit, the credit will be listed on your return.
Ok thanks for passing this along. After editing "Education Information" it adjusted things so that I am no longer paying tax on the 529 distribution (even though I've added the 1099Q info). Weird. I am 95% sure I went through these steps before. So maybe one of the updates I took now handles this better or maybe going back in and walking through these steps again made it "reevaluate". Anyway, thanks for the suggestion!
I received both a 1098-T (showing tuition and fees only) and 1099-Q (529 distribution) for my son's college education expenses. In TurboTax I entered everything as it appeared in both forms, as well as filling out the individual boxes for the other expenses (room and board on campus, books, internet service fees). We received a partial refund in the fall for room and board due to COVID as all students had been sent home for most of the semester. I deposited that amount back to my 529 and entered it into TurboTax when it asked. In the end, my expenses (tuition/fees, room/board, books) exceed the adjusted distribution amount (1099-Q box 1 less the refund), so I should not have to pay tax on any earnings, correct? TurboTax is adding some of the earnings to my 1040 as "Other Income". When I took the withdrawals to pay for college I was the recipient, not my son who is beneficiary. I have seen in some posts that I do not need to include the 1099-Q on my tax form, is this true?
Q. I have seen in some posts that I do not need to include the 1099-Q on my tax form, is this true?
A. Yes. 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."
Since you have determined that your expenses exceed the distribution, you have determined that none of it is taxable.
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 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!
Similar situation...something is glitching in Turbo Tax...I entered $18k in tuition as shown on my student's 1098-T, which exceeds the $11k 529 withdrawal on the 1099-Q, so nothing should be taxable. However, TT is generating 'other income' on line 8 of my 1040 of about $2k. When I switched to 'forms view' and looked at the 1099-Q, there's a worksheet on page 3 of that form comparing the 529 withdrawal amount to the qualified tuition expenses. It appears TT is subtracting $10k from the expense amount, so it thinks the tuition was $8k instead of $18k. To test it out, I plugged in $28k on the input screen, and again the worksheet dropped it by $10k, this time to $18k. Seems like a patch is in order...