My father-in-law and I each paid a portion of my daughter's college tuition. My daughter is my dependent. My father-in-law and I each wrote a check to the institution and the money was pulled from each of our 529 accounts. We each received our respective 1009-Qs and my daughter received the 1098-T. As I am entering the data into Turbo Tax, do I need to account for the fact that I only paid a portion of the tuition bill and that part of it was paid by my father-in-law? If so, how and where do I account for that? How will that affect credits and deductions?
Thanks in advance.
Amounts paid by a third party are considered to be paid by the you.
Qualified education expenses must be paid by:
Thanks for the information. Do I just enter my 1099-Q into Turbo Tax? Or would I need to enter both of them?
Thanks.
First, you have to decide how the education expenses that were paid will be allocated.
There are four things you can do with your Qualified educational expenses (QEE):
Room and board are only qualified expenses for a 529 distribution (not scholarships or the credit)
You will not enter grandpa's 1099-Q on your return. You will enter your daughter's 1098-T.
Q. Do I need to account for the fact that I only paid a portion of the tuition bill and that part of it was paid by my father-in-law?
A. Since the student is your dependent, you get to decide that based on the available expenses.
Q. If so, how and where do I account for that? How will that affect credits and deductions?
A. You need decide where to allocate expenses.
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Qualified Tuition Plans (QTP 529 Plans) Distributions
General Discussion
It’s complicated.
For 529 plans, there is an “owner” (usually the parent, but can be a grandparent), 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 $2800
3000/5000=60% of the earnings are tax free; 40% are taxable
40% x 2800= $1120
You have $1120 of taxable income
**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.
Thanks for the detailed reply. When you indicate that I have to decide how it is allocated, is there a worksheet or a place within TurboTax to do that? Or is that something I need to track myself and keep with my tax records?
Thanks.
Q. Is there a worksheet or a place within TurboTax to do that? Or is that something I need to track myself and keep with my tax records?
A. Some of each. The TurboTax worksheets cannot handle a two owner 529 situation. So, you have to adjust what you enter. That is, do not enter, on your return, any of the expenses used by grandpa, on his return. This may require entering an adjusted 1098-T.
The 1098-T should be adjusted to be the portion I paid for? If I paid 45% and grandpa paid 55%, is it as simple as me adjusting the 1098-T to be 45% of the total in box 1?
Thanks.
Q. The 1098-T should be adjusted to be the portion I paid for? If I paid 45% and grandpa paid 55%, is it as simple as me adjusting the 1098-T to be 45% of the total in box 1?
A. No. There are more qualified expenses than just the amount shown in box 1 of the 1098-T.
There is no way to make this simple.
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