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Level 3

529 taxable distribution due to scholarship and how to enter into Turbo Tax

Hoping someone can help with this - I have tried so many different ways.

 

Daughter is sophomore in college. We use 529 to pay for tuition, fees, room & board. We also get American Opportunity credit (last year) and want to again this year (for expenses outside of tuition, fees, room & board - so for books, supplies, and computer expenses). Daughter gets a full tuition scholarship from the university, so 1098-T shows tuition, fees, room & board, plus the amount of her scholarship (so in essence we used 529 funds to pay for all of that minus tuition since scholarship paid for tuition).

So, very intentionally we took out an 'extra' amount from 529 this year, close to the amount of one semester of scholarship, so she could buy a car (we also pitched in, not that it matters but fyi).

I tried TT online first; now I've paid for the download version so I can access the forms directly but I'm hoping to not have to override TT to edit the forms myself b/c then I can't file electronically.

 

Problem is, every time I let TT walk me through, it tells me our 529 plan distribution exceeded the amount of QEE, which it did, so it's not letting me have AOTC. But nowhere will TT let me tell it that a portion of the distribution is taxable (without 10% penalty due to scholarship) so that we can still get AOTC. I read one similar help post that said to be sure to enter the 1099-Q first - well I tried and it won't let me. It keeps saying I don't have to enter 1099-Q at all but if I want to, it is making me enter the education expenses first and the 1098-T which then means it won't give me AOTC.

 

When I look at the tax forms, it appears we need to report the taxable amount of the distribution as income on Schedule 1, line 8 - but I've gone into the income section time and time again and see no way to do this. Is my only option to override TT and edit the form(s) myself? Does anyone know a way to do this in TT so that I can report a portion of the 529 distribution as taxable due to scholarship, and then use the adjusted 529 tax-free amount to show as covering QEE whereby I will have QEE leftover that will go towards AOTC?

Thanks!!

2 Best answer

Accepted Solutions
Highlighted
Level 15

529 taxable distribution due to scholarship and how to enter into Turbo Tax

The 1098-T does not  usually include room and board. It's had to believe a college would make that mistake. 

Do not try to enter the taxable portion of the 529 distribution in the income section.  It's all done in the education (deductions/ credits) section.

The car is not a qualified expense, do not enter the purchase.

I'll assume the 1099-Q is in your name & SS# (you are the "recipient"), not your daughter.

 

Enter the 1099-Q first. Enter the 1098-T, then follow the interview to enter books and room and board. 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 the amount (usually $4000) you want to use or change it.

 

Or provide the following info and I'll tell you exactly how to do it.

Box 1 of the 1098-T

Box 5 of the 1098-T

Box 1 of the 1099-Q

Box 2 of the 1099-Q

How much you/she paid for room & board

How much you/she paid for books, computers and other course materials and tuition/fees not shown on the 1098-T.

How much reportable income does you daughter have and does sh plan to file a return

 

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 

 

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)

 

 ***An alternative is have the student report some of her scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Scholarship will (most likely) be taxed at a lower rate on her return than the 529 will be taxed on your return

View solution in original post

Highlighted
Level 15

529 taxable distribution due to scholarship and how to enter into Turbo Tax

Do not enter the 1099-Q on your return.  If it gets entered at all, it goes on her (the student's)  return ("1099-Q is in our daughter's name, not ours").

 

Enter the 1098-T, on your return.  Take a short cut*, enter $4000 in box 1 and 0 in box 5.

 

$20,911 of qualified expenses minus $4000 used for the AOTC = $16,911 can be used against the 1099-Q.  That's more than the 1099-Q box 1 amount, so just don't enter the 1099-Q, at all.

 

16,911- 13,278 = $3633 of left over expenses that can be considered paid by scholarship.**  Your student must report $6038 (9671 - 3633 = 6038) as taxable scholarship income.  You want to report scholarship as taxable income, not the 529 plan distribution, because: 1. Taxable 529 earnings  are investment income and subject to the "kiddie tax" and 2. taxable scholarship is treated as earned income, for purposes of the standard deduction calculation. 

Enter the 1098-T on your daughter's return, Take a short cut*. Enter 0 in box 1 and $6038 in box 5.  Since her total income is less than $12,200 (and none is classified as investment income). She will owe no tax.  Technically, she is not even  required to file.  But, I would file to document what you've done.  

 

*TurboTax is capable of arriving at the same conclusion by going thru the whole interview and you making the proper entries.  But, as you've already experienced, it ain't easy. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. 

 

**Side calculation: 3633 + 4000 = 7633, which is less than $11,486, so AOTC & tax free scholarship paid for only "qualified" expenses.

 

I'm posting my full standard reply below, some of which will be repetitive, but some was not already included, above, in this thread.

_____________________________________________________________________________

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.

 ***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.

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." 

View solution in original post

8 Replies
Highlighted
Level 15

529 taxable distribution due to scholarship and how to enter into Turbo Tax

The 1098-T does not  usually include room and board. It's had to believe a college would make that mistake. 

Do not try to enter the taxable portion of the 529 distribution in the income section.  It's all done in the education (deductions/ credits) section.

The car is not a qualified expense, do not enter the purchase.

I'll assume the 1099-Q is in your name & SS# (you are the "recipient"), not your daughter.

 

Enter the 1099-Q first. Enter the 1098-T, then follow the interview to enter books and room and board. 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 the amount (usually $4000) you want to use or change it.

 

Or provide the following info and I'll tell you exactly how to do it.

Box 1 of the 1098-T

Box 5 of the 1098-T

Box 1 of the 1099-Q

Box 2 of the 1099-Q

How much you/she paid for room & board

How much you/she paid for books, computers and other course materials and tuition/fees not shown on the 1098-T.

How much reportable income does you daughter have and does sh plan to file a return

 

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 

 

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)

 

 ***An alternative is have the student report some of her scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Scholarship will (most likely) be taxed at a lower rate on her return than the 529 will be taxed on your return

View solution in original post

Highlighted
Level 3

529 taxable distribution due to scholarship and how to enter into Turbo Tax

Thank you and sorry for the delayed response. I thought TT would email me when someone replied!

1. Sorry - the 1098T does not include room and board, you are correct

2. Was not planning on entering the car anywhere - I just provided that info as insight to give full picture of our situation

3. 1099-Q is in our daughter's name, not ours. We always be sure distributions either go direct to the college or direct to her.

4. 1098-T box 1: $11,496; box 5: $9671.00

5. 1099-Q box 1: $13278.00; box 2: $5720.10 (please note that $910 will be re-contributed to 529 due to refund from the school due to pandemic)

6. Total room & board: $4196

7. Books, materials, computer, fees not reflected on 1098T: $3233

8. Daughter has 0 reportable income outside of the additional 529 distribution used to purchase her car, which comes out to $3608 by my calculations

 

Thanks so much! I'll stay on this site rest of the week to reply and appreciate your help!!

 

 

Highlighted
Level 3

529 taxable distribution due to scholarship and how to enter into Turbo Tax

Also, one more question -  I have been going a bit more granular on the actual expenses since not everything eligible under 529 is eligible under AOTC and vice versa. Is this necessary (for example, fees not on the 1098-T that are still mandatory do not appear to be eligible under AOTC so I'm carving them out to be paid for by 529. And room and board not eligible under AOTC so has be under 529.

 

If I don't separate out items for 529 vs AOTC then I can just follow the simple approach:

total educational expense: $20,911

Minus tax free scholarship: $9671

Minus AOTC of $4000 (or a lesser amount of my choice in order to get at least $2000 AOTC eligible expenses) - maybe this is the part where my calcs decide how much of the expenses are eligible under AOTC? It is not a full $4000 to be sure.

Equals $7240 can be used against 1099-Q

THanks!

 

Highlighted
Level 3

529 taxable distribution due to scholarship and how to enter into Turbo Tax

FYI when I try to enter 1099-Q first, I get a message saying since I am not the recipient, I can skip entering it.  It then says I can enter the student's expenses first and then come back here and enter the 1099Q. 

But when I do that it wants me to enter the 1098-T and if I do that, this whole thing doesn't work. I'm not sure how to get around this? I tried saying we did not receive a 1098-T while going through the educational expense section but then it said we can't deduct any educational expenses. I'm stuck.

Highlighted
Level 15

529 taxable distribution due to scholarship and how to enter into Turbo Tax

Do not enter the 1099-Q on your return.  If it gets entered at all, it goes on her (the student's)  return ("1099-Q is in our daughter's name, not ours").

 

Enter the 1098-T, on your return.  Take a short cut*, enter $4000 in box 1 and 0 in box 5.

 

$20,911 of qualified expenses minus $4000 used for the AOTC = $16,911 can be used against the 1099-Q.  That's more than the 1099-Q box 1 amount, so just don't enter the 1099-Q, at all.

 

16,911- 13,278 = $3633 of left over expenses that can be considered paid by scholarship.**  Your student must report $6038 (9671 - 3633 = 6038) as taxable scholarship income.  You want to report scholarship as taxable income, not the 529 plan distribution, because: 1. Taxable 529 earnings  are investment income and subject to the "kiddie tax" and 2. taxable scholarship is treated as earned income, for purposes of the standard deduction calculation. 

Enter the 1098-T on your daughter's return, Take a short cut*. Enter 0 in box 1 and $6038 in box 5.  Since her total income is less than $12,200 (and none is classified as investment income). She will owe no tax.  Technically, she is not even  required to file.  But, I would file to document what you've done.  

 

*TurboTax is capable of arriving at the same conclusion by going thru the whole interview and you making the proper entries.  But, as you've already experienced, it ain't easy. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. 

 

**Side calculation: 3633 + 4000 = 7633, which is less than $11,486, so AOTC & tax free scholarship paid for only "qualified" expenses.

 

I'm posting my full standard reply below, some of which will be repetitive, but some was not already included, above, in this thread.

_____________________________________________________________________________

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.

 ***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.

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." 

View solution in original post

Highlighted
Level 3

529 taxable distribution due to scholarship and how to enter into Turbo Tax

Thank you, this is very helpful. I am not sure about the following however:

 

"Your student must report $6038 (9671 - 3633 = 6038) as taxable scholarship income.  You want to report scholarship as taxable income, not the 529 plan distribution, because: 1. Taxable 529 earnings  are investment income and subject to the "kiddie tax" and 2. taxable scholarship is treated as earned income, for purposes of the standard deduction calculation. "

 

This scholarship is for tuition. My understanding from IRS guidelines are that scholarships for tuition are not taxable. Can I just go and decide it is taxable? The scholarship is from the State of Georgia Hope/Zell Miller program that, in my daughter's case, covers full tuition The amount is exactly equal to the tuition charge at her school.

Thank you!

Highlighted
Level 15

529 taxable distribution due to scholarship and how to enter into Turbo Tax

Correct, scholarships that are for tuition (and other qualified expenses, books & fees) are not usually taxable. 

Can I just go and decide it is taxable? Generally, yes*.  But if the conditions of the scholarship are that it must be used for tuition, then no.  You may have to read the conditions. The fact that the amount is exactly equal to the tuition charge does not lock that in.  Read the school's billing statements.  Do they show a direct match to tuition or is the grant treated like a general payment to the student's account.

 

*This is not some sinister scheme. 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 this  “loop hole”.

Highlighted
Level 3

529 taxable distribution due to scholarship and how to enter into Turbo Tax

Ok, thanks! The school billing statement doesn't specify anything like that. But in looking at the online info for the scholarships, it says they "apply toward tuition payment only--based on hours enrolled." So I think I won't take a chance to claim it as taxable. I think I've got it figured out from here, but let me know if any other recommendation?

Thx so much!

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