Q. At what Adjusted gross income are MESP no longer deductible?
A. There is no AGI limit for a 529 plan (including MESP) distribution to be tax free.
Q. I entered all of this in both her tax return and my tax return, It is taxing her about $1200. Is that right?
A. No. As you said, the MESP distribution is fully covered by qualified expenses (room & board) and none of it is taxable.
TurboTax is doing a bad job, most likely assigning tuition to the education credit, when you're not eligible (income too high).
The 1099-Q and the 1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.
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 would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
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."
The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. Since you know that neither of these apply in your case, just don't enter the 1098-T either.
Q. I am getting note in TT saying after 180k all the earnings on the MESP are taxable, even on her return. Is that correct?
A. No. That's the income limit for claiming the education credit.
Q. Should i not take her as a dependent since she is funding all of this while at school even though it is not earned income.
A. No. Nothing you describe disqualifies her from being your dependent. Scholarships are disregarded in the dependent support calculation. Since you are the owner of the 529 plan, that support is yours, not hers.
Q. Based on other posts, it seems i should enter her 1098 T and 1099Q on my return, and then i really see no tax impact since there are expenses to offset the scholarships and MESP distribution.
A. If a 1009-Q must be entered (in your case it does not), it goes on the "recipient's" return. 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".
Q. But TT keeps asking on her return if she received a 1099Q and 1098T so it is making me nervous to say she did not.
A. TT asks because, for most people, there's a benefit. In your case, there is not. Entering them just causes confusion. They are not required to be entered.
