529 Contributions and Employer Reimbursement

[gradstudenthelp]

I am a graduate student and not a dependent on my parents tax return. My parents are the owner of a 529 with me as the beneficiary. They received a 1099-Q from the 529. I also received tuition reimbursement from my employer. The employer reimbursement, 1099-Q, and 1099-T are all entered in TurboTax and all education questions have been answered. 

However, when reviewing the “draft” return this does not appear to be represented consistent with my understanding of the situation. Form 8917 in the “draft” return appears to only be factoring in the employer tuition reimbursement as an adjustment to qualified expenses, and not factoring in the qualified distributions from the 529. The result is that it indicates that a tuition and fees deduction can be taken, which is not consistent with my understanding since all qualified expenses were covered by qualified 529 distributions and employer tuition reimbursement.

Thoughts on how to use the software to accurately represent this situation?

[Hal_Al · Accepted solution]

My parents are the owner of a 529 with me as the beneficiary. They received a 1099-Q from the 529.

You should not be reporting their 1099-Q on your tax return.

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.

**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. 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." 

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As to your question, TurboTax (TT) is capable of handling the situation, but it is complicated.  Sometimes it's best to use a work around. TT will assume the tuition credit or deduction is more beneficial and assign some of the expenses to it.

Provide the following info and we can give you more specific advice:

• Confirm who was recipient of 1099-Q
• amounts in boxes 1 & 5 of the 1098-T. Is the box 5 amount the employer reimbursement or something additional
• amounts in boxes 1 & 2 of the 1099-Q
• Amount of reimbursement.  Was reimbursement received in 2019
• were you a half time or more student
• Parent's tax rate
• your tax rate

Update your software.  Form 8917 should not still be "draft".