AOTC/LLC and 1098's taxable

[nancydeg]

I am so confused on the education credits and 1098's and hope someone can help...

Son 1 - took 4 years of AOTC, looking to use LLC

$23,845 tuition paid per box 1 1098T

$2,000 scholarships per box 5 1098T

$11,152 distribution per box 1 1098Q for me of which $5990.50 box 2 earnings

$7,238.20 distribution per box 1 1098Q for son of which $3,892.14 box 2 earnings

Son 2 - 1st year and no credit taken previously, looking to use AOTC

$16,928.57 tuition paid per box 1 1098T

$2,500 scholarships per box 5 1098T

$19,816.71 distribution per box 1 for son of which $10,219.41 box 2 earnings

If I add 1098Q's for my first son it reduces my refund by $2k, tells me $4k taxable income for second son. I do not believe any of the distributions are taxable because we also have $8k in room and board not entered into TT that are properly not included on 1098T so the amount we paid exceeds the 529 earnings.

I read here to not include my son's 1098Q and when I do that my education credits on Sch 3 line 3 is 3,465 = $1485 ($2475-990) nonrefundable credit 1040 line 20/8863 line 19 + $1980 ($2000*.99) 8863 line 18

2475 = $2,500 * .99

AGI does not exceed $180k so only phase out is .99 multiplier due to $160,213 total income

$3,465 in nonrefundable credits seems too high plus $990 refundable AOTC and I am concerned something is wrong. 

Is it correct to exclude my son's 1098Q's?

Am I correct the 529 earnings are not taxable?

How do I determine how much of $4455 (3465+990) in credits relates to AOTC and LLC

Does $3465 represent $1980 LLC for son1 and $1485 AOTC for son 2?

So basically $2k LLC for son 1 and $2500 AOTC for son 2 = $4,500 without phase out/multiplier

I just don't want to screw up these credits and jeopardize that I cannot take them in future years.

Thanks!

[Hal_Al]

Q. $3,465 in nonrefundable credits seems too high plus $990 refundable AOTC and I am concerned something is wrong. 

A. No, that's probably right, for 2 students. $2000 LLC + 1500 AOTC = $3500 max. x 0.99 = 3465.

Yes, $3465 represents ~$1980 LLC for son1 and ~$1485 AOTC for son 2. 

Yes,  basically $2k LLC for son 1 and $2500 AOTC for son 2 = $4,500 without phase out/multiplier. 

Q. I read here to not include my son's 1098-Q ?

A. That's correct. Don't enter your 1099-Q either.  

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. 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 (you don’t need it). You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit.  For son 1, your numbers show that there is more than $10K left over for the max LLC.  That assumes the $8000 room and board mentioned was for son 1. 

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”.
3. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 

How much room and board expenses does son 2 have?

• If student lives off campus, what is school's R&B on campus charge. If he lives at home, what's the school’s R&B “allowance for cost of attendance” for student living with parents.

What Other qualified expenses does he have? How much for books and a computer, if any?

You need about $9400 more expenses or some of the 1099-Q and/or some of his scholarship is going to be taxable. Does he have any other income to report. 

[Hal_Al]

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

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 American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). 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 regardless of whose money was used to pay 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 which is only qualified for the 1099-Q)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**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.

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." 

***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. Most people come out better having the scholarship taxable before the 529 earnings. A student, with no other income, can have up to $14,600 of taxable scholarship (in 2024) and still pay no income tax. 

[nancydeg]

Son 1 room $8,162 (off campus apt) excludes board/groceries + $439 other fees & books

Son 2 room & board $8008 (on campus billed by Univ) + $1,298 fees, books & laptop

I get $34,364 tuition & expenses for son 1 (excluding scholarship) less $10 used for LLC more than offsets $18,390 withdraw from 529 per 1098Q of which $9883 came from earnings per 1098Q. So, I conclude nothing is taxable.

For son 2 $28,876 tuition & expenses (excluding scholarship) less $4k used for AOTC more than offsets $19,817 withdraw from 529 per 1098Q of which $10,219 came from earnings. So, I conclude nothing is taxable. 

Are my assumptions correct? No taxes.

[nancydeg]

The $8,008 room and board I mentioned in original question is for son 2, however, we paid $8,162 in rent for son 1 for off campus apartment. This amount does not reflect any board/groceries. Ironically they are about the same amount.

[nancydeg]

Son 2 does not have any income to report.

[Hal_Al]

Q. Are my assumptions correct? No taxes.

A. Yes, in both cases. 

I didn't re-do the math for son 1, as your revised numbers didn't change anything.*

For son 2, I don't see where your $28, 876 comes from. But, it doesn't matter.

$16,929 + 8008 + 1298 = 26235 - 2500 -4000 = 19,735.  That results in about $42 of reportable income.  Since he has no other income, he does not need to file. So, no tax (and no penalty since the scholarship/credit exception applies). 

*Technically, you may not be able to use the $8,162 rent  you paid. For off campus living you use the lesser of your actual cost or the school's "allowance for cost of attendance" (basically what on campus residents pay).