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Level 15

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

College Education Expenses

Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:

 - Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*

- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.

Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”.  The first one indicates a choice. The second one provides no choice.

Now there are two separate determinations to be made here.

  1. Who claims the student as a dependent.

  2. Who reports all the education expenses and claims all the education credits.

     

    First, who claims the student as a dependent?

    If the student:

    Is under the age of 24 on Dec 31 of the tax year and:

    Is enrolled in an undergraduate program at an accredited institution and:

    Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a full time student) and:

    the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

    Then:

    The parents qualify to claim the student as a dependent on the parent's tax return . Period, End of Story. But one thing I want to point out here. The parents *QUALIFY* to claim the student. The parents are *NOT* required to claim the student as a dependent. But even if they don’t, since they *qualify* to claim the student, then if the student will be filing their own tax return the student is *REQUIRED* to select the option for “I can be claimed on someone else’s return”.  To reiterate:

    If the student qualifies to be claimed on the parent’s tax return, then the student can not take the self-exemption on their own tax return, no …matter…what.

     

    Who reports all the education expenses and claims all the credits?

    If (and only if) the parents qualify to claim the student as a dependent, *and* the parents actually are claiming the student as a dependent, then:

    The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:

    The parents will claim all educational tax credits that qualify.

    If the student will be filing a tax return and:

    The parents qualify to claim the student as a dependent, then:

    The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option even f the parent's qualify to claim the student as a dependent, and the parents do not claim them.

     

    Here’s when the parents will claim the student as a dependent, but the parents will NOT claim any of the education expenses or report the 1098-T on the parent’s tax return.

     

    .If the amount of scholarships/grants/529 funds exceeds the amount of qualified education expenses,  then the student will report the education stuff on the student’s tax return. The parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.)  Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.

    In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.

     If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6350, then the student doesn’t even need to file a tax return, and nothing has to be reported.

    If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.

    Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6350, then the student should file a tax return so as to get those withheld taxes refunded.

     

    1099-Q Funds

 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. It automatically gets transferred as follows depending on what type of 1040 you’re riling.

1040-EZ excess scholarship income is included on line 1.
1040-A excess scholarship is included on line 7.
1040 Excess scholarhip is included on line 7.

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 transferred as indicated above with one exception. For the 1040 excess ESA/QTP funds get transferred to line 21 with the annotation “SCH” next to it.

Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.

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.


Level 7

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

@Carl Wow! what a thoughtful and thorough writeup.
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Level 15

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

I can't take credit for hardly any of it really. It's bits and pieces I've assembled over the years from others. I think @VolvoGirl was the biggest contributor to it though.
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Level 1

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

Thanks.  This is very helpful.  I wish TurboTax was as helpful as you!  Here's a scenario.  My son has scholarship to cover tuition, fees, room and board.  I withdrew some funds from 529 to pay for required computer.  How does that get reported so as to avoid tax?  Does my son report 1099Q or me?  Thanks.
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Level 15

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

"  I withdrew some funds from 529 to pay for required computer."
That is a lab expense. The "lab fees" category is rather broad. Lab fees can be paid with scholarships/grants, or 529 funds and be exempt from taxation.Basically, any type of equipment listed in the course syllabus for a class, that the student is required to acquire at their own expense, is a lab fee.
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Level 1

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

Right but does my son report the withdrawal or do I?  He will be reporting the 1098T and expenses.
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Level 15

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

If "you" the parent did not pay any out of pocket qualified education expenses because they were all covered by scholarships, grants and 529 funds, then while you will still claim the student as a dependent, it is the student that will report the education stuff on the student's return.
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New Member

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

Carl, Thanks! I think I finally was able to get TurboTax to reflect what I did but I have a simple question.  All of my withdrawals from our 529 were used for qualified college expenses except I withdrew an additional non qualified $500 as my daughter received a $500 scholarship.  I know we have to pay tax on the earnings (no 10% penalty); however, the earnings were only $105.  My daughter is the recipient on the 1099-Q and she had no other earnings in 2017. Does she have to file a tax return to account for the $105?  I assume she doesn’t...
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Level 15

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

If your daughter's total reportable earnings are less than $6350, then it doesn't need to be reported by her. Her reportable earnings would be anything reported to her on a tax reporting document, such as a W-2, 1099-INT, 1099-MISC, and the such. If you take that amount and add the *un* qualified part of the 1099-Q to it, and it does NOT exceed $6350, then she doesn't need to file it.
Also, I bet you that the excess does qualify. Remember, 1099-Q funds can be used for the qualified education expenses of tuition, books, and lab fees *AND* the unqualified expenses for room and board, provided that room and board is in support of the student's education. If she's living more than 50 miles from home, then there's no doubt it's in direct support of the student's education.
Finally, The "room" part of that is not just rent either. It also includes the cost of utilities (electric, water, internet, etc) and the "board" part includes food. So are you sure you can't allocated the 1099-Q funds you are calling excess, to those expenses?
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New Member

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

Carl, thanks again! I am pretty diligent in recording all those expenses and knew the $500 would be excess.  However, since my daughter has no other income in 2017 to report, sounds like I don’t need to file a return for her and the $500 excess will go untaxed since it is all she can report and far less than the minimum for filing.
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New Member

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

My daughter's qualified expenses exceed the 529 distributions from the 1099 Q  however, my income is being increased by $6,700, but this income is not taxed per form 5329.  This increase in income is disqualifying me from a ROTH contribution.  Why is this additional amount being added to my income?
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Level 15

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

Scholarships, grants and 529 funds not used for *qualified* education expenses are taxable income *to the student*. Even though it's the student that will pay taxes on that money, it will be taxed at the parent's higher tax rate. So if there are excess funds, the last paragraph of the answer above applies to you.
For scholarships, the only qualified education expenses are tuition, books and lab fees. That's it, with no exceptions. But the category for lab fees is rather broad.
For 529 funds reported on a 1099-Q the only qualified expenses are tuition, books, lab fees *and* room and board. Now don't forget that the cost for the "room" part is more than just the rent. It includes the cost of utilities too. Then there's even more folks that don't even consider the "board" part. I'm sure the student had to eat while they were in college, and that their food was not free.
So after taking into account everything for room and board, if there is still excess 529 funds, then the last paragraph of the answer above, applies.
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New Member

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

laurenpriebe, I had to delete the 1099Q and 1098T twice and re-enter for TurboTax to allow me to get to the room and board entry.   I would delete and re-enter in the steps that TurboTax wants them.  Once I did that, it recognized room and board as expense and it did not count any of the 529 withdrawal as income.
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Level 15

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

One thing that I just can't seem to stress enough, is that when you have a 1099-Q, it is important to work through the education section the way it is designed and intended to be used. If you do not, then chances are extremely high that you will not be asked for room & board, thus making that part of the 1099-Q TAXABLE INCOME to the student.
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New Member

Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

Carl - thanks for your help.  Room & board were being included. I found the error in the student info worksheet.  My daughter's scholarships (from the university - included on 1098 T) were being deducted from tuition paid.  My tuition bill already took this deduction into account.  Once I adjusted the worksheet, the qualified expenses were correct.