Amount Used to calculate Education credit or Deduction?

[lololalabell]

We received 1099Q $21,000 and 1098T $14,000.  Our son has room & Board $7000, Computer $1500

How do I put the amount in "Amount Used to calculate Education credit or Deduction"?  TT wants me to try different values between $1,500 and $4000, then recalculate to see what produces the best result.   When we put $4000, we got the best result (more refund) but I am concerned why TT let me put any different values.  How to handle this?

[MinhT1 · Accepted solution]

You are allowed to split your education expenses between the portion used for education credits and the portion used to offset your 1099-Q distribution in the manner which is most tax efficient for you. And TurboTax can help you do that.

In all cases, the tuition should first be used to obtain the American Opportunity credit if your son is eligible. $4,000 of tuition will give you a tax credit of $2,500. Then the balance of the tuition of $10,000 plus room and board $7,000 plus computer $1,500 for a total of $18,500 is used for the 1099-Q distribution. This means that you have $2,500 out of a distribution of $21,000 which are not used for non-education expenses (11.9%). And you pay tax and the penalty on 11.9% of the earnings reported on the 1099-Q. This would be way smaller than your credit of $2,500.

[lololalabell]

Thank you for your reply. 

If I put $4,000 (my son is eligible) in "amount used to calculate education credit or deduction "to get the max return.  Do I have to put $2,500 which are not used for non-education expenses when I do NY state tax "Total Nonqualified Withdrawals", or TT will put those amounts for me automatically?

I am not aware of AOC, that's why I withdrew 529 exact the same amount of Tuition, Board & Room.  Is it a good idea to withdraw $4000 less next year (2020).

Thank you

[KrisD15]

You do not need to enter the distribution adjustment on the New York return. 

Remember that the credit is based on Tuition, Book and fees. 

The distribution can be used to cover expenses such as room and board and transportation expenses. 

When you make a distribution and part of that is taxable because the student received a scholarship or you receive an education credit, the distribution is taxable to the student, but there is no penalty tax.

When you decide how much to withdraw this year, remember that if there is a balance when the student is no longer attending school, the account must be rolled over to a family member or will be subject to the 10% penalty. For this reason, you might want to take the full distribution and have the student pay the income tax rather than leave it in the account and pay income tax as well as a penalty tax when the student is no longer in need. It depends on the account balance, how much will be needed in the future and if you would want to roll over the account in the future. 

[Carl]

See if the below additional clarification of "how things work in the real world" will help you with understanding what's going on here.

 - Scholarships and grants can only be used for the qualified education expenses of tuition, books, and lab fees. That's it, with no exceptions. Of course, the category for "lab fees" is rather broad and can include the cost of purchasing a computer for the student in that tax year if there was an absolute requirement for the computer in order for the student to successfully complete any one course during the tax year that required it. (Now-a-days, the reality is, it's an absolute requirement.)

1099-Q funds can be used for the qualified education expenses of tuition, books, and lab fees, along with the additional unqualified but allowed expense of room and board *provided* that room and board was "in direct support" of the education. A few notes about this room and board too.

- Room--- The "room" portion of room and board includes rent and utilities, which can also include the cost of internet access since most "classroom work" is done online and must be submitted electronically.

 - Board--- This is the cost of food. So if the student is living on campus and paying for a college sponsored meal plan, 529 funds can be used and claimed to pay for that plan.

Now here's the restrictions on the amount of "room and board" you can claim.

If the student is living off campus by their choice, then the "room" cost claimed of room and board can not exceed what it would cost the student to live on-campus. Period. Additionally, they can only claim what is "directly related" to the education. So if the student does not enroll in summer classes for the summer semester, yet remains in the property and continues to pay rent, the rent they pay for those months they are not enrolled in a class are flat out not deductible.

Exceptions: If the student is living off-campus not by their choice, then either the school does not offer on-campus housing, or the student has in their possession a letter from the school informing them that on-campus housing is not available for them. (They will have a letter for each semester they are enrolled). In such a case, the cost of the "room" part of room and board can exceed what it would cost to live on campus. However, the cost must be "reasonable" for the area the student is living in. So if you rent a $5000 a month penthouse suite for the student and try claiming that expense, you can probably expect a personal visit from an IRS audit agent armed with a warrant and possibly accompanied by a few federal marshals. (Okay, I exaggerated on the marshals. But you get the point.)

For the "board" part, if the student is living off campus by their choice, then what is claimed for food costs can not exceed what it would cost the student to enroll in a meal plan for that semester. That would be hard to do anyway, because one can eat significantly cheaper by purchasing and preparing their own food. But note that if the student is not enrolled for classes in the summer semester, then their food cost are just flat out not deductible at all for the semester. 

The exception is that if the student is living off-campus *not* by their choice (they have a letter from the school) then their food costs can exceed the cost of a food plan for that semester. however, it's still true that those costs must be "reasonable". So not steak and eggs for breakfast every day with steak and lobster for lunch and dinner every day either. 🙂

But even so, the cost of "eating out" (which is basically what you're doing when you purchase a meal plan) is always going to cost more than preparing your own meals and eating at home. So it's rather difficult (in my opinion) for one's off campus food cost to actually exceed the cost of a meal plan.

Now with all that said, here's how the IRS applies "the money" to your education and education related expenses.

 First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income "ON THE STUDENT'S TAX RETURN. It automatically gets transferred to and included in the total on line 7 of the 1040.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is included in the total on line 7 OF THE STUDENT'S TAX RETURN.

Finally, out of pocket money is applied to qualified education expenses. Out of pocket expenses can only be applied to the three qualified education expenses. They can not be applied to room and board. No exceptions here.

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.On top of that, the student will be taxed on that income at the higher, parent's tax rate. (sometimes referred as the "kiddie tax")