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lucynerus
Returning Member

529 distributions went directly to school, beneficiary is my daughter, my dependent. Entered 1098-T on my return, got educational credit. Entering 1099-Q, TT says that portion of earnings (309 of 440) is taxable and my daughter needs to file a return.

Is this portion of earnings an earned or unearned income for her?  I figure it's unearned. Please chime in. Thank you!

 

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6 Replies
Hal_Al
Level 15

529 distributions went directly to school, beneficiary is my daughter, my dependent. Entered 1098-T on my return, got educational credit. Entering 1099-Q, TT says that portion of earnings (309 of 440) is taxable and my daughter needs to file a return.

That's very possible. See example below.  It's unearned income and if her only income, not enough to file, except for one technicality.  She would have to file form 5329 to claim the 10% penalty exception (because the credit was claimed).  Form 5329 can be filed as stand alone document, and does not have to be attached to a 1040. 

_______________________________________________________________________________________

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 $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

You have $1120 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
Level 15

529 distributions went directly to school, beneficiary is my daughter, my dependent. Entered 1098-T on my return, got educational credit. Entering 1099-Q, TT says that portion of earnings (309 of 440) is taxable and my daughter needs to file a return.

Many users fail to enter room and board expenses, when entering the 1098-T and 1099-Q.  If this your situation, none of it may be actually taxable. 

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 1099-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. If the student lives at home, only the school's board charge for on campus students. 
  • 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
  • Are you trying to claim the tuition credit (are you eligible)?
  • Is the student an undergrad or grad student?
lucynerus
Returning Member

529 distributions went directly to school, beneficiary is my daughter, my dependent. Entered 1098-T on my return, got educational credit. Entering 1099-Q, TT says that portion of earnings (309 of 440) is taxable and my daughter needs to file a return.

Answers:

I am a parent

She is my dependent

Box 1 on 1098-T - 24,300

Box 5 on 1098-T - 13,490 (grants and federal loans)

no scholarships

it doesn't

no scholarships

Box 1 on 1099-Q - 2718

Box 2 on 1099-Q - 440

my daughter's name and SSN, she is the student

she lives off campus, I pay her rent

no other expenses

earned $785from a job

I have claimed the credit already

undergraduate

 

 

Hal_Al
Level 15

529 distributions went directly to school, beneficiary is my daughter, my dependent. Entered 1098-T on my return, got educational credit. Entering 1099-Q, TT says that portion of earnings (309 of 440) is taxable and my daughter needs to file a return.

TT has made a mistake. None of the 1099-Q is taxable. You have more than enough expenses to claim the American Opportunity Credit and the 529 distribution to be tax free, even without room and board. Just delete the 1099-Q . 

lucynerus
Returning Member

529 distributions went directly to school, beneficiary is my daughter, my dependent. Entered 1098-T on my return, got educational credit. Entering 1099-Q, TT says that portion of earnings (309 of 440) is taxable and my daughter needs to file a return.

Ok, I will delete it. Does my daughter need to file?

 

FangxiaL
Expert Alumni

529 distributions went directly to school, beneficiary is my daughter, my dependent. Entered 1098-T on my return, got educational credit. Entering 1099-Q, TT says that portion of earnings (309 of 440) is taxable and my daughter needs to file a return.

If your daughter did not have other income in 2021, just ignore the 1099-Q form. She does not need to file.

 

@lucynerus

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