529 plan with a scholarship

[samuel2025]

My parents opened a 529 plan for me, but I used very little of the money because I received scholarships that covered most of my educational expenses. I'm now graduating from graduate school, so my parents directed a final distribution of the remainder of the account balance to me. I have a 1099-Q showing me as the beneficiary, the gross distribution ($127,000), the earnings ($100,423), and the basis ($16,577).  I also have about $12,000 in additional earned income between me and my wife (filing jointly). 

Over the past 8 years, I've received a total of over $127,000 in scholarships. In 2024, I received $17,875 in scholarships as documented on my 1098-T. My 1098-T also states I had $27,932.29 in education expenses. My parents paid the difference ($10,057.29) with a separate 529 distribution that they are claiming on their taxes.

I know that distributions in excess of qualified educational expenses due to scholarships are exempt from the 10% penalty, but still taxable as income. I have two questions. 

1) Should I use the $17,875 as the component that was withdrawn due to scholarship, or can I include scholarships from prior tax years?

2) Either way, how do I enter this in TurboTax? I've seen the workaround based on listing the 1099-Q student as "someone else not listed here", but trying that still did not give me an option to adjust the portion that is exempt from the 10% penalty. 

Thank you!

[Hal_Al]

Q. Should I use the $17,875 as the component that was withdrawn due to scholarship?

A. Yes.

Q. Can I include scholarships from prior tax years?

A. Technically, No. That said, see https://ttlc.intuit.com/community/college-education/discussion/529-plan-withdrawals-and-prior-year-s....

Q.  Either way, how do I enter this in TurboTax? I've seen the workaround based on listing the 1099-Q student as "someone else not listed here"

A. That's still the best way because of the simplicity. 

The workaround is: when asked who is the student, check "someone else not listed here" (Lying to TurboTax to get it to do what you want does not constitute lying to the IRS). On the next screen, enter the real student's name.  This will eventually give you one simple screen to enter all expenses. Press Done at the 1099-Q summary screen, to get there. 

After entering your expenses, enter the total expenses (or the scholarship amount, if less) in the box “Tax Free Assistance”. This reports the earnings as taxable and claims the scholarship exception. TurboTax will prepare form 5329 to claim the scholarship penalty exception.

[samuel2025]

That's helpful. I'm still struggling to get the workaround to work. I listed the student as "someone else not listed here" and I'm not seeing a screen that allows me to enter expenses. I wonder if TurboTax has changed the interface?

[Hal_Al]

Press Done at the 1099-Q summary screen, and go thru a few more screens to get to the expenses entry screen