529 Issues

[Kerney]

I always seem to have significantly more trouble doing my children’s taxes because of how turbotax handles 529 withdrawals and corresponding valid college expenses.  So here are this years issues:

• I transferred $7k from my child’s 529 to their Roth.  I have not found a way of working through the turbotax system to enter this as the money is comingled with normal 529 withdrawals on the 1099-Q form from the 529 company.   I created a second 1099-Q entry in Turbotax checking the box for ‘direct transfer’, but turbotax is still treating it as a taxable withdrawal.  Reading other questions to this forum it says to simply not report this money into turbotax at all which seems wrong as I’d then be ‘partially reporting the 1099-Q’ which seems like a red flag to the IRS.
• I didn’t realize the college did this until this year as my daughter graduated in December 2024 with no spring 2025 tuition..….Spring 2024 (last spring) her tuition was in 2023’s 1098-T statement (it flowed in late December 2023) from her college, but her scholarships she received for spring 2024 are in 2024’s 1098-T (they flowed early Jan 2024).  Therefore, it ‘appears’ she received almost 20k over her tuition which turbotax is treating as taxable income.

It's just frustrating to spend hour/hours of time working on my children's taxes that their only complication is 529s while my/wife's relatively complicated taxes took me about 30 minutes to do.  

[Hal_Al]

Re the 529 to Roth IRA issue, see: https://ttlc.intuit.com/community/college-education/discussion/mesp-money-directly-transferred-to-ro...

To be  a valid 529 to Roth rollover, it must be a trustee to trustee transfer.

[Hal_Al]

Re: The mismatched tuition and scholarship:

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return.  However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. You can just not enter it if it serves neither purpose. 

If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2024 expenses".

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

[Hal_Al]

The 1099-Q is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return.

 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. 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 would 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. 

It is not a red flag to the IRS, not to enter the 1099-Q. The IRS says so.

References:

1. 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." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
3. ("IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form." 

[Hal_Al]

"as the money is comingled with normal 529 withdrawals on the 1099-Q form from the 529 company"

To be  a valid 529 to Roth rollover, it must be a trustee to trustee transfer.