Q. I have listed the 529 funds as Qualified Education Expenses (529) on the Qualifying Education Expenses Worksheet for Students other than Taxpayer, Spouse or Dependent. Is this correct?
A. Yes. There is no requirement that the beneficiary of the 529 plan be your dependent. As long as the funds were used for the beneficiary's educational expenses*, including room and board, then the distribution is qualified (tax free).
If all the funds were used, for her education, you do not even need to enter the 1099-Q.**
But, you do need to coordinate with her. If she is claiming the education credit on her return, you can not double dip. That is, you cannot use the same expenses she used to claim a credit, to claim the earnings exclusion on your return. ***
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*The funds do not literally need to pay for expenses. The requirement is only that the distribution occur in the same year that the student-beneficiary has qualified expenses.
**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."
***Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000 used to claim the American Opportunity credit on the student's return)
=$3000 Can be used against the 1099-Q (on your 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)
