529 Plan replaced beneficiary

[MH-20]

Hi,

I originally had created a 529 Plan for my daughter, who lives in NC.  In 2024, I submitted a CFNC application to replace the current beneficiary, my daughter, to my niece, who lives in NJ.  A check was issued in my niece's name; this was used to pay her Education's loans.  This year, I received a 1099-Q form having my niece's name in the "RECIPIENT'S name" box.  Who should file this form with the tax (myself or my niece).  Is the gross distribution including earnings tax free for both Federal and NJ State?

Thanks for your help!

[Hal_Al · Accepted solution]

Q.   Who should file this form with the tax (myself or my niece)?

A. Probably nobody*.  Otherwise, your niece who was the recipient.

Q.  Is the gross distribution including earnings tax free for both Federal and NJ State?

A. Yes, usually. But, you haven't said how much was taken out. There is a $10,000 lifetime limit on 529 funds being used to pay student loans and the distribution remain tax free.  

For 529 plans, there is an “owner” , and a “beneficiary” . 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.

*You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including student loan payments up to $10,000, 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 (which you do not need).

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”.

[MH-20]

Thanks for your reply!  I have missed mentioning that Gross distribution (Box 1) is $3237 (less than 10K) and it actually covered all the beneficiary's expenses.  So, in this case and according to what you have said, the beneficiary might choose to report it (that will require them to make an amendment as they already filed their taxes) or might choose not to report it.

[Hal_Al]

Q. So, in this case and according to what you have said, the beneficiary might choose to report it (that will require them to make an amendment as they already filed their taxes) or might choose not to report it?

A. Yes.