529 distribution for professional credential expenses

[BK2000]

Legislation change: Signed into law on July 4th, 2025, the OBBBA initiated 529 plan rule changes that include an expansion in the definition of qualified expenses. Many credential programs (such as a CPA exam) are now qualified.

Question: Where and how should the 1099-Q 529 distributions, as well as the new qualified exam expenses (no 1098-T) be entered into the TurboTax Windows desktop program? So that the program can figure out any tax liability.

NOTE: I am aware that some tax experts may suggest to not enter the 1099-Q if it fully covers the qualified expenses - just keep good records. But that is not always an option such as this example: I withdraw $3,000 from the 529 to cover $2,500 exam fee. So I have a $500 excess distribution with ~$200 earnings as taxable income + the 10% penalty. In this scenario we need TurboTax program's help to properly calculate the taxable liability. Which means I should enter the 1099-Q data as well as the exam fees and expenses somewhere. Where and how, what is the workaround?

Then need to figure this out at the State level as well if the State such as CA does not conform. The "expanded use of 529" in the state section does not currently seem to accommodate this.
Thank you.

TurboTax Deluxe Windows desktop

[Hal_Al · Accepted solution]

Q.  Where and how, what is the workaround?

A. Yes, a workaround is highly recommended.

Enter the 1099-Q. When asked who the student is answer: someone else  (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's (your) name when asked.  This way gets you  one simple screen to enter expenses. Press continue at the 1099-Q summary screen. You'll get a screen titled non-dependent summary. Click on the edit (pencil) symbol. Follow the interview. At the "one simple screen", credential expenses will not be an option. I'd use the tuition or books box for all your expenses.

You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later and the current TT glitches. 

TT will prepare form 5329 to report the penalty. 

[BK2000]

@Hal_Al 

Thank you - This actually works! However:
Doing so generated an INCOMPLETE "ESA/QTP Worksheet" because it requires a value in the pink field. Using the same test figures in my original post, this is what I get in the "ESA/QTP Worksheet"

Although I already did enter the credential expenses of $2,500 (blue oval in the image), the pink "incomplete" field remains blank.

My followup question is: Do I enter zero or $2,500 in the pink field?

I am guessing zero is the correct answer, since if I enter $2,500, I will be double counting the credential expense leading to no penalty. TIA.

[Hal_Al]

I don't know.  Try both and let us know what works.  

[BK2000]

Zero is the correct answer based on my testing.

Zero:

Excess distribution = 500

Taxable earnings = 200 (+ penalty)

2,500:

Excess distribution = 0

Taxable earnings = 0 (no penalty)

[BK2000]

@Hal_Al 

Thank you very much as always. You are brilliant.

[BK2000]

There is a second and rather opposite approach to this based on my testing. In summary, using @Hal_Al 's excellent workaround:

Approach 1: (this is what I initially did)

• In the step-by-step interview section, enter the credential program expense in the tuition field ($2,500)
• Then go to the "ESA/QTP Wks" and enter the credential program expense = 0 (the pink field of the image I posted earlier)

Approach 2: (opposite of above)

• In the step-by-step interview section, leave all expenses blank.
• Then go to the "ESA/QTP Wks" and enter the credential program expense = $2,500 (in the pink field of the image I posted)

End result of both approaches is the same. But you have to do one or the other and not both. Hope this helps others. Most likely by the time someone needs this info, TT has redesigned this section.