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adrianv
Level 1

529 plan, AOTC, and 1098-Q send to parent and student

My daughter is a full time student at one school, also took classes toward her degree at a second one.  We got a 1098-T only for her full time school.   And the expenses were split in a kind of random way into two 1098-Q forms, one that went to the parent and one to the student.  (This happened due to covid house refunds.) 

My daughter got a $2k scholarship.

 

Based on my understanding of the tax rules our best strategy is the following breakdown:

 

$2150 in expenses allocated to AOTC

$10k allocated to tax free 529

$2k allocated to taxable 529 (because of scholarship)

 

So if that's right, how do I force TurboTax to limit the AOTC amount to $2150 in costs ($2037.5 in credit, I think)?  It just wants to take it all.  Can I enter part of the total from the two 1099-Q forms on my (parental) tax return?  (That is, the total of the two forms minus 2150?)  That would leave $2150 for TurbotTax to apply to the AOTC.    But what about the expenses for which there's no form (books, and the school with no form)? 

 

I assume I want the $2k taxed on her return, I do it again?  Enter the 1098-T there and then the offsetting 529 expenses, the ATOC claimed? 

 

1 Best answer

Accepted Solutions
Hal_Al
Level 15

529 plan, AOTC, and 1098-Q send to parent and student

 

Q.  On my taxes I report the 1098-T and take the ATOC?

A.  Yes

Q.  I ignore the 1099-Q on my return,

A.   Yes

 

Q.  On my daughter's taxes I report just the taxable part of the 529 distribution?

A.  Yes

Q.. Do I just figure out what that number is from my records and put it somewhere?

A. Yes, since you have already done all the work.   The normal  way to do is enter the 1099-Q, the 1098-T, expenses and adjustments and let TT do the calcs.  But, mistakes can and frequently do happen. 

Q. Where?

A. In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

Scroll down to:

  -Less Common Income

      -Misc Income, 1099-A, 1099-C

       - On the next screen, choose – Other reportable income  

       - On the next screen, click yes

       - On the next screen, you'll get blanks to enter the amount ($1800?) and a description "Qual Tuition Prgm from 1099-Q".  TT will put in on line 8, schedule 1, Other Income

 

Keep your notes and calculations, in case of an IRS inquiry.

 

View solution in original post

19 Replies
MarilynG1
Expert Alumni

529 plan, AOTC, and 1098-Q send to parent and student

Did you have any 'out of pocket' Education Expenses that were not covered by Scholarships or 529 distributions?  If not, you don't qualify for an Education Credit and don't need to enter either the 1098-T or 1099-Q in your return. 

 

If 529 Distributions were only used for Qualified Education Expenses (which would include room and board), you don't need to enter the 1099-Q in your return.  Click this link for more info on Form 1099-Q

 

If you believe that your daughter has Taxable Scholarship Income, enter the 1098-T's and 1099-Q on her return.  

 

You can enter Education Expenses not reported on a 1098-T (save your receipts), such as Tuition, Books, etc.  Just enter the school info and indicate that 'you didn't receive a 1098-T'

 

The AOC credit amount is equal to:

  • 100% of the first $2,000 of qualified expenses, plus
  • 25% of the expenses in excess of $2,000.

Review the Student Information Worksheet to see how the credit is calculated. 

 

Since we can't see your tax return in this forum, you may want to request an Offline Review if you need more help. 

 

 

 

 

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adrianv
Level 1

529 plan, AOTC, and 1098-Q send to parent and student

My expense breakdown looks something like this:

 

$11000 tuition to full time school (from 1098-T)
$2000 tuition to other school (no 1098-T received)
$400 books

$13400 total

 

And then payments:

$2000 scholarship

$11250 from 529 plan

 

I have been reading that I can choose how to allocate expenses, so we paid $11250 toward total expenses of $13400.   That leaves $2150 we didn't cover.   And then the scholarship.  It sounds like you're saying we cannot choose to allocate things this way?  

 

If there were no scholarship then with $11250 paid from the 529 we'd have $2150 left over for the AOTC.  With the scholarship I've been reading you can take out the amount of the scholarship as taxable income from the 529.  Is that not true then if you are using the AOTC? 

KrisD15
Expert Alumni

529 plan, AOTC, and 1098-Q send to parent and student

It is true that you can allocate an unrestricted (not ear-marked for anything in particular) scholarship to expenses other than tuition and use the freed-up expenses towards a credit, but the other expenses must be education related. 

 

Education expenses, such as tuition, fees, books, and supplies can be used towards a credit. 

 

Other education expenses include Room and Board. 

 

If you allocate the scholarships to the tuition, the scholarships are tax-free. 

If you allocate the scholarships to the room and board, the scholarships become taxable income for the student. 

 

This could be beneficial if it freed up expenses for the credit, HOWEVER in your case, the 529 distribution is allocated to the room and board. 

 

The student can't "Just Decide" to claim the scholarships as income. The funds must be allocated to SOMETHING related to education, whether taxable or not. 

 

Depending on when you received the refund, it could be re-deposited back into the 529 account. 

If the Room and Board refund was because the student needed to attend school online, you can add the room and board expense incurred while she was at home. You still had to pay for a roof over her head, internet access and meals I assume. 

 

 

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Hal_Al
Level 15

529 plan, AOTC, and 1098-Q send to parent and student

Usually you allocate $4000 to AOTC. That gets you the maximum AOTC. Although the first $2000 does get you the most benefit. 

Then you allocate as much as is needed to the 529.

Only allocate to scholarships whatever is left over, since the student will pay little or no tax on taxable scholarship because of  a larger standard deduction for scholarship income.

_____________________________________________________________________________________________

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 $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.

Hal_Al
Level 15

529 plan, AOTC, and 1098-Q send to parent and student

@KrisD15 said: "The student can't "Just Decide" to claim the scholarships as income. The funds must be allocated to SOMETHING related to education, whether taxable or not". 

 

Yes, he can, as long as the conditions of the grant don't require the scholarship  be used for tuition and other qualified expenses (books and fees).

 

From the 2019 form 1040 instructions (pg 95): “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040, line 18c, and IRS.gov/EdCredit.  Page 16 of PUB 970 (2019) actually has examples of how to do the “loop hole”.

adrianv
Level 1

529 plan, AOTC, and 1098-Q send to parent and student

Suppose I get a scholarship for my full tuition.  I thought I was allowed to take the cost of tuition out of the 529 as a taxable distribution (without penalty).  Is that not possible in this case?   That is, the distribution from the 529 doesn't have to be allocated to an actual expense, it can be balanced with the scholarship instead.  Do I misunderstand?   Then my accounting looks like this: 

 

Total expenses $13400

AOTC $2150

scholarship $2000

529 tuition and room and board payment (tax free) $9250

529 scholarship withdrawal amount ($2000) taxable

 

The 529 withdrawal is exactly $2000 too much, which is accounted for by the scholarship.  

 

My daughter lived at home for part of the semester (semester started on time, but housing opened late).  Is there some standard way for me to estimate the costs of her living at home for tax purposes?   It was about a month. 

 

 

Hal_Al
Level 15

529 plan, AOTC, and 1098-Q send to parent and student

Room and board and computers  are qualified expenses for a 529 plan.  If the student lives at home, you can use your actual food cost or the school's meal allowance.  In your case, prorate it for the 1 month.

 

Come up with a room & board amount and then let's allocate the numbers.  

 

Are you saying, for sure, that the $2000 scholarship was required to be applied to tuition?

 

Your accounting is basically correct, except that it does not contain amounts for room and board.  

adrianv
Level 1

529 plan, AOTC, and 1098-Q send to parent and student

My "tuition" expense was the total listed on the 1098-T that includes tuition and room and board paid to the school. 

 

I do not know if the $2k scholarship had any specific requirements on how it is "allocated" for tax purposes.    I assume I have to talk to someone at the school about that, if it's something I need to figure out.   It was a merit scholarship issued by the school and they paid it by simply reducing the tuition bill.  Does that mean it has to be allocated to tuition? 

 

Her computer was a gift from her grandmother.   Books were already included in my total. 

 

We pay monthly for the wifi, $120/month, I believe.  Four of us live here.  I can divide the wifi by 4.    If I take annual food cost for 2020 and divide by 48 (12*4) I get a single month food cost of $450.   But that's going to be hard to justify---I don't have all the receipts for the year.   The school's meal plan is $2189 for the semester.  If I assume a 15 week semester and she was at home 5 weeks that's $730, so that's higher than our actual cost of food.   For housing we have taxes and insurance (house is paid off).   I can divide that by 48 as well....? 

 

KrisD15
Expert Alumni

529 plan, AOTC, and 1098-Q send to parent and student

I do believe you could do it that way, scholarship to room and board and then the student claims the excess 529 distribution. (IF THE SCHOLARSHIP WAS NOT RESTRICTED TO PAYING TUITION EXCLUSIVELY)

The penalty tax on the 529 distribution would be waved because of the scholarship. 

 

This is what I base my answers on:

According to the IRS PUB 970 Page 16: 

“Coordination with Pell grants and other scholarships. You may be able to increase your American opportunity credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student's gross income. Your credit may increase only if the amount of the student's qualified education expenses minus the total amount of scholarships and fellowship grants is less than $4,000. If this situation applies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees.”

From this I believe scholarship funds must be matched to education expenses "Qualified" or "Non-qualified"

 

However on page 54 of Pub 970 it states: 

"Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren't used for both benefits. This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Example. Derek Green had $5,800 of qualified higher education expenses for 2020, his first year in college. He paid his college expenses from the following sources. Partial tuition scholarship (tax free) $1,500 Coverdell ESA distribution 1,000 Gift from parents 2,100 Earnings from part-time job 1,200 Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Total qualified higher education expenses $5,800 Minus: Tax-free educational assistance −1,500 Minus: Expenses taken into account in figuring American opportunity credit − 4,000 Equals: Adjusted qualified higher education expenses (AQHEE) $ 300 Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. The balance in Derek's account was $1,800 on December 31, 2020. Prior to 2020, $2,100 had been contributed to this account. Contributions for 2020 totaled $400. Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. 1. $1,000 (distribution) × $2,100 basis + $400 contributions $1,800 value + $1,000 distribution = $893 (basis portion of distribution) 2. $1,000 (distribution) − $893 (basis portion of distribution) = $107 (earnings included in distribution) 3. $107 (earnings) ×    $300 AQHEE    $1,000 distribution = $32 (tax-free earnings) 4. $107 (earnings) − $32 (tax-free earnings) = $75 (taxable earnings) Derek must include $75 in income (Schedule 1 (Form 1040), line 8). This is the amount of distributed earnings not used for adjusted qualified higher education expenses."

Therefore I believe if the scholarship can be applied to the room and board (NONQUALIFING EDUCATION EXPENSES) the excess 529 distribution can be claimed by the student and the penalty tax is waved since the room and board was paid for with the scholarship. 

Additionally, the tax on the distribution is only on the earnings portion, so better than claiming the scholarships. 

 

I have also included a link to an IRS Topic which states how scholarships must be reported: 

IRS Topic 421 

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Hal_Al
Level 15

529 plan, AOTC, and 1098-Q send to parent and student

 $13,400 qualified expenses

-      2,000 pay by scholarship (sounds like it's restricted, but it won't matter)

-       4,000  used for the  AOTC

=     7,400  can be used for the 529 

+      4, 378  Room & Board (2189 x 2)

=    11, 778  Total expense for the  529 Since that's more than the $11,250 distribution, none of the                                              distribution is taxable

 

Just don't enter the 1099-Q on either your return or the student's.  Enter the one 1098-T on your return to claim the scholarship. Don't bother entering any other numbers

 

If needed,  some of the internet (while attending at home) is a 529 expense.  A student's expense's are qualified, regardless of who paid.  So, the cost of grandparent's gift computer is also includable (if the main purpose, of the purchase, was for school)

 

 

adrianv
Level 1

529 plan, AOTC, and 1098-Q send to parent and student

No, the room and board is *included* in the 11185.48 listed on 1098-T.   Is this a mistake on the school's part?   (I didn't overlook a $5k out of pocket expense!) 

 

Since this was her first semester this is only a half-year cost.   Tuition and fees is approx $6800.  Board is supposed to be $2189 per semester and room $3000 per semester.  

 

The only expenses I haven't listed would be cost of staying at home for part of the semester and the grandparents' cost to buy the computer (which was indeed purchased for school and was 1300 if memory holds). 

 

 

Hal_Al
Level 15

529 plan, AOTC, and 1098-Q send to parent and student

Q. No, the room and board is *included* in the 11185.48 listed on 1098-T.   Is this a mistake on the school's part? 

A.  Yes, or you are misunderstanding what's on the 1098-T.  Room and board does not go in box 1 or anywhere on the 1098-T.  Sometimes Box 1 will include money for the tuition for the first term next year.

 

You can count the $1300 for the computer and a reasonable estimate (based on the school's meal plan) for the food cost at home. 

adrianv
Level 1

529 plan, AOTC, and 1098-Q send to parent and student

The amount in box 1 seems to exactly match what we paid in 2020 for tuition, fees, room and board, minus a housing deposit.  We didn't pay the spring 2021 tuition until January so it would be strange for it to be listed in 2020. 

 

So in summary then I believe I can do the following with approximate numbers

 

Tuition: 6500

Housing paid to school: 5000

Books:400

computer bought by grandma: 1300

Food while at home: 500

 

Total: 13700

 

ATOC: -4000

Scholarship: -2000

 

Remaining qualified expenses: $7700

total distribution from 529: 11000

non-taxable distribution from 529: 7700

taxable distribution from 529: 3300

 

The excess 529 distribution can appear on my daughter's tax return and will be about $1800 in income.  But it is not subject to a penalty because it is smaller than the ATOC credit.  (I believe you avoid the 10% penalty if you have either scholarships or a tax credit covering the unqualified distribution.) 

 

Is this all correct? 

 

 

Hal_Al
Level 15

529 plan, AOTC, and 1098-Q send to parent and student

Q.  Is this all correct? 

A.  Yes, basically.

 

I don't see where you said how much was in box 2 of the 1099-Q.  But apparently you used that amount the calculate the $1800 taxable income. 

 

Technically,  the $1800 it is not subject to a penalty because the $3300 (not $1800)  is smaller than the AOTC.  Yes, you avoid the 10% penalty if you have either scholarships or a tax credit covering the unqualified portion of the distribution

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