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bigdog7413
Level 1

529 plan and I still have to pay taxes?

So My Son had no income in 2019. He received the 1099Q Form from the 529 Plan Trust. Turbo Tax is saying he has to pay almost 800 dollars in taxes? All of the money was used for qualified expenses. The Plan actually sent the tuition check directly to the school for $10,341.70 so other than some books and a computer he bought with the extra how is it he has to pay taxes on the 529 plan money.

 

So here are the details.

His Tuition, Room and Board, and other 529 qualified expenses were $11,703 (after the application of a $6000 scholarship) as stated on the 1098T. The Gross Distribution was $12841 for a difference of $1138. We used that difference to buy his computer and some textbooks.  So after adding the 1098T to my tax return we qualified for 2 of the 3 college tax credits.

 

I started a return for him to file the 1099Q info but it shows he has to pay $784 in taxes... on money that is supposed to be tax-free. I'm really missing something here. Can anyone advise on what I'm doing wrong?  529 Plan was supposed to be tax-free for qualified expenses. we didn't fudge a thing... I have receipts for every dime spent.  I could really use some guidance here or I'm filling my first extension in 35 years. Or is the 1099Q form wrong.

 

Thanks

 

 

1 Best answer

Accepted Solutions
Hal_Al
Level 15

529 plan and I still have to pay taxes?

Q. So basically don't file a return for my son.?

A.  That is correct

 

Q. I was under the impression that if the 1099Q came with his name and social it had to be reported on his return?

A. No.  As the answer said, you only report it if you know some of it is taxable. 

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." 

 

Q. is the taxable distribution listed as the Earnings in the 1099Q?

A. No. But, if any of the distribution  is taxable, the earnings in box 2 would be the maximum amount.

 

Read on for more about 529 plan distributions, including when you may actually want to pay a little tax.

________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans)

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 $600

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

60%x600= $360

You have $240 of taxable income (600-360)

 

**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.

View solution in original post

9 Replies
SusanY1
Expert Alumni

529 plan and I still have to pay taxes?

There are a few ways to resolve this in TurboTax, but the simplest since you are certain that the funds did not exceed expenses when distributed is to remove the 1099-Q from the tax return.  The IRS only requires that you enter the information from Form 1099-Q if there is a taxable distribution to be reported. 

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bigdog7413
Level 1

529 plan and I still have to pay taxes?

So basically don't file a return for my son. He had no income to report last year and no w-2s. I was under the impression that if the 1099Q came with his name and social it had to be reported on his return, but with no income...?

 

 

Thanks for your reply. 

bigdog7413
Level 1

529 plan and I still have to pay taxes?

is the taxable distribution listed as the Earnings in the 1099Q?

Hal_Al
Level 15

529 plan and I still have to pay taxes?

Q. So basically don't file a return for my son.?

A.  That is correct

 

Q. I was under the impression that if the 1099Q came with his name and social it had to be reported on his return?

A. No.  As the answer said, you only report it if you know some of it is taxable. 

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." 

 

Q. is the taxable distribution listed as the Earnings in the 1099Q?

A. No. But, if any of the distribution  is taxable, the earnings in box 2 would be the maximum amount.

 

Read on for more about 529 plan distributions, including when you may actually want to pay a little tax.

________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans)

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 $600

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

60%x600= $360

You have $240 of taxable income (600-360)

 

**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.

View solution in original post

Hal_Al
Level 15

529 plan and I still have to pay taxes?

@bigdog7413 

I'm sorry. I did not read your original post before replying to you last post.

 

You probably do have some taxable distribution that your son needs to report. You say  " So after adding the 1098T to my tax return we qualified for 2 of the 3 college tax credits."  That's not correct. You can only quality for one credit. The most generous  of the credits, the American Opportunity credit (AOC) requires $4000 of tuition expense. If you divert $4000 from your $11,703 of total expenses, you no longer have enough expenses to cover the  $12,841 distribution. The $784 of tax could well be right.

 

But there is still  a way to bring it down to 0.  Instead of making part of  the 529 plan earnings taxable, you may be able to make part of the Scholarship taxable. Scholarship income is used in calculating a dependent's standard deduction, but 529 plan earnings do not.  

bigdog7413
Level 1

529 plan and I still have to pay taxes?

Would love to know how to do that. 

bigdog7413
Level 1

529 plan and I still have to pay taxes?

Would love to know how to do that. How do you make the 529 taxable and the scholarship not and where? the only thing on my son's return is this 1099Q. he has no income. so even if I finagle a way to get this worked out it's still telling me I cant E-File because I have zeros in 7b,8b, 12a,12b,13b,16, and 19 on form 1040 because he has no income to report. 

 

I thought this would be pretty cut and dried but since this is my first go-around on this 529 plan stuff I had no idea it would get this convoluted.

Hal_Al
Level 15

529 plan and I still have to pay taxes?

Here's the simplest solution: he just doesn't file a tax return.  He will have $4000 of taxable Scholarship as his only income.  His standard deduction will be $4350, so he does not need to file.  You would like him to file a return to document that he reported the scholarship as income (it supports your claim to the AOC).

 

If he reports the the 1099-Q, as income, instead of the scholarship, he will have about $3000 of income (I don't know what your box 2 amount is, so I'm estimating). But his standard deduction is only $1100. So he has taxable income and must file and may be subject to the kiddie tax on investment income.

 

If you are interested in filing, here are some previous posts, with details. If you still need help, reply back .

https://ttlc.intuit.com/community/college-education/discussion/re-form-1099-q-for-qualified-college-...

https://ttlc.intuit.com/community/college-education/discussion/is-any-of-my-son-s-college-scholarshi...

 

bigdog7413
Level 1

529 plan and I still have to pay taxes?

You have been very helpful and generous with your time. Thank you.

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