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DL401
Level 1

529 plan qualified distribution counting as income problem

I'm the recipient of a $28,817 distribution from a state 529 Plan in 2020 benefitting my child, who is in graduate school (post-college).  This entire amount was for qualified expenses.  I received a 1098-T with $46,253 in scholarships, which the school kept and applied toward reduced tuition.  Tuition payments to the school, including this $46,253 scholarship credit, were $59,895, so our out-of-pocket cost for tuition were around $16,000.   My child also has $12,400 in room and board costs and $1100 for books.  Total qualified expenses were thus $29,500, which exceeds the $28,817 529-plan distribution on the 1099-Q.

For reasons I don't understand, Turbotax's form, the 1099-Q worksheet, lists only $22,400 of the $28,817 distribution as qualified expenses, with $6,417 listed as "excess distributions" and lists $1,008 as taxable to me.  I don't think that there were any "excess distributions" or that any of the distribution should be taxable, as it all went for qualified expenses.  (My child had no work income related to the school.)

Help with entering the data so as to get the correct result on my forms would be very much appreciated.

1 Best answer

Accepted Solutions
Hal_Al
Level 15

529 plan qualified distribution counting as income problem

Yes, grad school is college and is (usually) pursuing a degree.

 

Simple answer to your other concerns is delete everything related to education, the 1098-T and 1099-Q.  You have determined that none of the 1099-Q is taxable nor is any of the scholarship reportable and taxable.  You are not required to enter either document.

 

That said, let's open another issue. You stated " I don't think we got, or qualified for, this credit.  There is another tuition credit, in addition to the one limited to 4 years (AOC-American Opportunity Credit).  It's the Lifetime Learning Credit (LLC) and is available to Grad students.  Your child doesn't have enough income to claim it, on his own return.  But, if he qualifies as your dependent, there is loop hole available for you to claim it.  It's worth 20% of the tuition paid, up to $10, 000. It's non refundable, so you must have some tax liability.  Your child would have to report some scholarship as taxable. But, if he has no other reportable income, the tax is 0, after the standard deduction. 

To qualify as your dependent, he, most likely,  would have to have been under 24 on 12-31-20.

 

View solution in original post

15 Replies
KrisD15
Expert Alumni

529 plan qualified distribution counting as income problem

The program is taking 4,000 expenses for the education credit since that is more valuable than the amount of tax you pay on that portion of taxable distribution. 

 

At the conclusion of the Education Interview in TurboTax, it should have stated the credit which it advised you take. You can change that if you want. 

 

Type   letme   into the search box

Click the    "jump to letme"   link that appears. 

The program will direct you to a screen where you can see which credit(s) you are eligible for and allows you to make a selection. 

 

The IRS allows you leeway and options for how education expenses, distributions, and scholarships can be reported so that the Taxpayer may get the better tax break. 

 

Please look at IRS Pub for more information. 

IRS Pub 970

 

 

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Hal_Al
Level 15

529 plan qualified distribution counting as income problem

$59,895 – 46253 = 13,642 (not 16,000).

13,642 + 12,400 + 1100 = 27,142 Qualified expenses for the 1099-Q (not $29,500)

28,817 -27,142 = $1675 Non-qualified distribution

1675 / 28,817 x the amount in box 2 of the 1099-Q = your taxable income

 

For why TT came up with $22,400 instead of 27,142, you need to check your entries and the 1099-Q worksheet and the student info worksheet. 

DL401
Level 1

529 plan qualified distribution counting as income problem

KrisD15--thank you for responding, but I don't think we got, or qualified for, this credit.  My student already has completed 4 years of college and we got the credit each of those 4 years.  (https://www.irs.gov/newsroom/american-opportunity-tax-credit-questions-and-answers Question #12.)

Hal_Al
Level 15

529 plan qualified distribution counting as income problem

KrisD15 may be right. This has been a glitch in TT, in the past (I haven't checked it this year). It tries to give you a credit when you don't qualify.

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit” verify that it is 0. If there is an amount there, change it to 0.

 

If that happened, it would also show on the worksheets.

DL401
Level 1

529 plan qualified distribution counting as income problem

Hal_Al, Thank you for your response.  You are of course correct about my arithmetic error--thanks.  (I noticed it right after I sent the question).  I've adjusted the figures, so that the qualified expenses equal the 529 distribution, but I'm still seeing some anomalies that perhaps you can advise me on:

1) I don't understand why TT gives me a message saying that my child's education assistance counts as income and that my child needs to file a tax return and that the $46,253 is taxable.  I believe this is not the case, since all the distribution was used for room/board, tuition, and books only.

2) when I followed your suggestion and looked for the student info worksheet, I see that there is no category for post-graduate/professional school.  Should I check the box (2C) for "college," even though they graduated from college some years ago?  Checking the "college" box seems to solve my "excess distribution" problem and reduce my "earnings taxable to recipient" to zero.  However, on the worksheet, there is a black "x" for Part 2 (Student Information) for both questions 3 and 4 in the "No" column.  The correct answers in this case are actually both "Yes"--they are in a degree program and they are doing a post-secondary degree to improve job skills-- but I don't seem able to change this No to a Yes on the form.

Appreciate your advice on this and would ask TT to consider adding a "Graduate School" category or more clearly differentiating between "College" and post-graduate degree programs, or else noting that "college" includes post-college programs, if that's how it works.  

Hal_Al
Level 15

529 plan qualified distribution counting as income problem

Yes, grad school is college and is (usually) pursuing a degree.

 

Simple answer to your other concerns is delete everything related to education, the 1098-T and 1099-Q.  You have determined that none of the 1099-Q is taxable nor is any of the scholarship reportable and taxable.  You are not required to enter either document.

 

That said, let's open another issue. You stated " I don't think we got, or qualified for, this credit.  There is another tuition credit, in addition to the one limited to 4 years (AOC-American Opportunity Credit).  It's the Lifetime Learning Credit (LLC) and is available to Grad students.  Your child doesn't have enough income to claim it, on his own return.  But, if he qualifies as your dependent, there is loop hole available for you to claim it.  It's worth 20% of the tuition paid, up to $10, 000. It's non refundable, so you must have some tax liability.  Your child would have to report some scholarship as taxable. But, if he has no other reportable income, the tax is 0, after the standard deduction. 

To qualify as your dependent, he, most likely,  would have to have been under 24 on 12-31-20.

 

View solution in original post

DL401
Level 1

529 plan qualified distribution counting as income problem

Thanks very much for your help. 

You're right, I believe they qualified for the Lifelong Learning Credit (although they turned 25 in mid-2020, TT is counting them as my dependent).  

 TT could avoid confusing users by using "College or Graduate School" instead of "College."  To anyone working in higher education, at least, "college" and "graduate school" are mutually exclusive categories.

sgiitb85
Level 3

529 plan qualified distribution counting as income problem

I am running into similar issues with 1099-Q and 529 distribution. I have posted a question related to this for another reason in the recent past. Here is the latest question

1) I have recd a 1099-Q for - I am the recepient and my daughter is the beneficiary.

2) She has recd a 1098-T for the tuition that was paid in 2020.

3) There are other expenses for room, board, and books.

 

I have paid for 100% of her expenses. She has not recd any scholarship. My total distribution from 529 is little under the sum of tuition fees and other expenses. Yet, when I enter 1098-T, it doesnt give me credit for it. I understand that I wouldnt qualify for either of the learning credits. But as long as the total expense is more than what I got back from 529, my tax bill should be zero. TT is not including the amount on 1098-T as a qualified education expense. 

It states that due to my income I cannot take the tuition credit, but I think that is valid for American Opportunity or other types of learning credit.  That is a different issue.

 

I have seen on this forum that if I know that the expenses are greater than the distribution then just delete these forms and not report it. Can I do that? Doesnt the 1099-Q go to the IRS? Help please.

Hal_Al
Level 15

529 plan qualified distribution counting as income problem

Q. I have seen on this forum that if I know that the expenses are greater than the distribution then just delete these forms and not report it. Can I do that?

A. Yes

 

Q. Doesn't the 1099-Q go to the IRS? 

A. Yes, the plan administrator sends a copy to the IRS, as well as you.  But TurboTax does not.  If the 1099-Q amount is fully covered by expenses and  If TurboTax does it properly, it will enter nothing about the 1099-Q on the actual tax forms.  

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." 

IGH94
New Member

529 plan qualified distribution counting as income problem

I was having the same problem and just found the error.  I went to the Education Expenses Summary and chose edit next to my son's name.  Then I went to edit Education Information.  The very last question asked while editing that is about felony drug convictions.  For some reason the program defaults to Yes, my student had a drug conviction.  I chose No and immediately that corrected the problem.

 

I hope that helps.

 

sgiitb85
Level 3

529 plan qualified distribution counting as income problem

Hello,

I am back again. Trying to finish my taxes in turbo tax.

 

So to recap 

1) My student was a full time student in 2020

2) I got the 1099-Q in my name and she got the 1098-T in her name

3) I paid for all her expenses.

4) She didnt get any scholarship. She had a very small earned income.

5) By IRS definition, I can claim her as a dependent, but I dont want to. However, there is a question that asks - Can this student be claimed as your dependent? I believe the answer is YES. But where do I tell turbo tax that I dont want her to be considered a dependent. She will file her own tax form.

Hal_Al
Level 15

529 plan qualified distribution counting as income problem

The easiest way to not claim her is delete her from TurboTax.  Otherwise the only way to not claim her is lie to TurboTax when it asks you all the dependent questions.   Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

 

But, what are you trying to accomplish by not claiming her?  What ever it is, it won't work.  On her return, she must check the box that says she CAN be claimed by someone else.  That makes her ineligible for stimulus money (recovery rebate credit). 

There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. You usually must have actually paid tuition, not had it paid by scholarships & grants.  It is usually best if the parent claims that credit. 

Reference: Line 7 instructions for form 8863. https://www.irs.gov/instructions/i8863

 

Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12,400), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.  TT will check that box on form 1040.

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

 

 

sgiitb85
Level 3

529 plan qualified distribution counting as income problem

Thanks for your detailed answer.

 

The reason I want my daughter to file her own taxes this year is for her to claim the stimulus money. But you mention that she cannot be eligible for the stimulus money since she would need to state that she can be claimed as a depended on someone else's form. If this is true, then it wouldnt make sense for me to not claim her as a dependent and should file my taxes like I do every year. 

sgiitb85
Level 3

529 plan qualified distribution counting as income problem

Hello,

 

I walked through all education expenses steps and was ready to e-file. And for some reason turbo tax is not using the tuition amount from 1098-T as an expense. So a portion of distribution from a 529 fund is now becoming an income. A refund has now turned into a good amount due to IRS. This is frustrating. Dont know where to go in TT to fix this problem. Please help.

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