Confused about why my taxes went up after qualified 529 Distribution

If you have ascertained that qualified education expenses plus room and board of the beneficiary cover the amount of the distribution reported on form 1099-Q, you can just not report the 1099-Q on your tax return at all. You just keep the form in your tax records together with calculations to show that you have enough education expenses and room and board to cover the distribution.

 

On form 1099-Q, instructions to the recipient read: "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." 

Q. I was under the impression that 529's were tax free earnings as long as it is used for qualified college tuition and books?

A. That's correct. Room and board are also qualified expenses for a 529 distribution.

 

Q.   So why am I paying more after this section?

A. Because there are many ways to go, with educational tax benefits and TurboTax (TT) doesn't always do a good job. 

 

But there's a simple solution: just delete the 1099-Q.

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! 

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”.

Thank you although things just got corrected.  There were a few other areas for education that I didn't think I needed to enter.  After I got pinged to finish those areas later the amount dropped off back to the original number. All good now.