I am a bit confused about the way that TurboTax is handling our qualified education expenses when trying to apply them against 529 distributions reported on 1099-Qs.
Here is my situation:
This fact set means that the $23,900 total distributed from 529 plans and reported on 1099-Qs is about $108 less than the tuition and fees billed by the school that were not covered by scholarships and grants. And please note that none of the amounts above include any of the additional costs for books or room & board that the parents also paid in 2021.
I entered the 1098-T received from the school on the tax return that I am preparing for us (the parents) in TurboTax. I also entered both the 1099-Qs on our return and I did properly identify the one that was issued under our son’s SSN as being issued that way. After making these entries in TurboTax, it said that I was not eligible for any tax credits but that that the student would have to report $1,155 of taxable income from his distribution on his own return.
Why would he have any taxable income? The qualified educational expenses not covered by the scholarships/grants exceeded the total of the gross distributions made from the 529s and reported on the 1099-Qs. So, why would any of that be taxable? And, since qualified educational expenses can include books (and I think even some room and board expenses), where can those expenses be entered into TurboTax in order to have them added to the qualified education expenses total?
My son will also be doing his own tax return for his W-2 wages from a job using TurboTax. Could he just safely not report the 1099-Q under his SSN on his return? Or is that not recommended since the 1099-Q is sent to the IRS? Or can he somehow manually enter additional qualified educational expenses to cover that $1,155? [As a side note, I cannot figure out what the math might be for the $1,155 taxable amount calculated by TurboTax.]
Q. Could he just safely not report the 1099-Q under his SSN on his return?
A. Yes, that is exactly what he should do. You also should not report the 1099-Q on your return either**. The TurboTax interview and your situation are just too complicated (it does work when everything is done just right). Don't enter the 1098-T, on either return 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.
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. Receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. You don't have either. Books cover the minor difference in $amounts. Room and board also qualify for a 529 distribution.
Yes, the 1098-T can be entered on both returns, with adjustments, when needed. But don't do that in your case.
** Note that JillS56's long write up also states **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.
I have been thinking about this a little more. Although I still have not figured out why TurboTax was indicating that my son might have taxable income from the 1099-Q issued under his SSN, I was thinking about a possible workaround to get the desired result of neither my son nor I having any taxable income from these 529 distributions. Since I did not qualify for any educational tax credits, could I have my son put the 1098-T on his return to cover the 1099-Q under his SSN? Is that allowed since he is my dependent? Would that mean that the 1099-Q issued under my SSN would then count at taxable income on my return? Can the 1098 be “split somehow” then to cover both 1099-Qs? Or can qualified education expenses be added manually?
The 1099-Q was issued to your son, he must report the 1099-Q on his return. Since you are claiming your son as a dependent, only you can take the education credit. The 1098-T must be reported on your return. To accomplish what you are asking read through the information below and there is an example of how you might be able to give your son enough credit so that he does not have to report income on the 1099-Q or at least some of it.
More than you want to know about Qualified Tuition Plans (QTP 529 Plans) distributions
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 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 $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
**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.
Thank you for the reply. Since I appear to not be eligible for an education credit and since we also have more than enough total qualified education expenses to cover both of the 1099-Qs issued, could we just leave off the 1098-T from my return and the 1099-Qs off both my return and my son's?
Q. Could he just safely not report the 1099-Q under his SSN on his return?
A. Yes, that is exactly what he should do. You also should not report the 1099-Q on your return either**. The TurboTax interview and your situation are just too complicated (it does work when everything is done just right). Don't enter the 1098-T, on either return 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.
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. Receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. You don't have either. Books cover the minor difference in $amounts. Room and board also qualify for a 529 distribution.
Yes, the 1098-T can be entered on both returns, with adjustments, when needed. But don't do that in your case.
** Note that JillS56's long write up also states **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.
A bit confusing to get contradictory advice from two different “experts” with one saying “you will have to include 1099-Q and 1098-T in your tax return” and the other saying that they can safely be left out. I have reviewed the “Instructions for Recipient” info on both of the 1099-Qs and they both do say that they are not required to be filed with the return and that the recipient is responsible for determining their taxability. Based on that, I am going to go with the advise from Hal_Al to just leave the 1099-Qs and the 1098-T off of both returns. Thanks.
Dear TurboTax, please fix this problem. It seems I am not the only one seeing a portion of 1099Q being reported as income even though payment reported on 1098-T is enough to cover the distribution of 1099Q.
After removing all 1099Q and 1099T as suggested above, my tax actually went up. I think it is because I can no longer claim the $2000 credit for higher education. TurboTax picked reporting "portion" of 1099Q distribution as income and taking the education credit for me. However I am still not clear how the "portion" of 1099Q as income is derived. In my case, the reported income from 1099Q distribution is about 10.55% of the total distribution (not just the earnings).
You may lose the credit, but you would not be entitled to the credit since you took a distribution from a 529 Plan that covered the tuition costs. The key to whether to report or not report the 1098-T and the 1099-Q is whether or not the amount of Box 1 of the 1098-T after deduction Box 5 is equal to, less than, or more than the 1099-Q. If the 1099-Q is more than Box 1 less Box 5, then the excess is reportable as income. However, if you have documentation that qualified education expenses exist to cover the excess amount, then you would not want to report the 1099-Q and 1098-T on your return and just keep the documentation with your tax records.
If the amount of the 1099-Q and the 1098-T are equal then there is nothing to report. Room and Board and books, etc. cannot be used for the education credit.
Finally, if the 1099-Q is more than Box 1 less Box 5 of the 1098-T you would want to enter the documents as you could be eligible for the credit.
Keep in mind when evaluating what is the best course of action 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."
As for the 1098-T, there is no reporting requirement if you are not eligible for the education credit. You cannot use 529 Plan funds and take the education credit unless your tuition expenses end up being in excess of the amount taken from the 1099-Q.
I realize that this is very confusing and I have attempted to give you some scenarios and how the 1098-T, 1099-Q, and the tuition credit would be calculated. AOTC can only be used for tuition and that is why Box 1 and Box 5 of the 1098-T are the critical factors in the computation. If there is an excess amount with the 1099-Q you are obligated to report that as income.
There are three things you can do with your Qualified educational expenses (QEE):
TurboTax allocates QEE, in that order, until you tell it otherwise. You can choose to allocate them differently. So, to claim the tuition credit, go through the entire education interview until you reach a screen titled "Your Education Expenses Summary". Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it. It takes $10,000 of expenses to get the maximum $2000 Lifetime Learning credit or $4000 to get the maximum $2500 American Opportunity Credit
Instead, in the education interview, you may reach a screen titled "Choosing a larger education Credit". Verify that TT has entered $10,000 (the amount needed to get the maximum LLC) in the box on that page. In your case, change it to the amount you want to use.
PLAN C. On the Student Information Worksheet (abbreviated Student Info Wk on the forms list), go to part VI and change line 17 (“Used for credit”) to 4000. Make the change in the first column. That will automatically change the other columns.
See the sample above on how the taxable portion of the 1099-Q is calculated (repeated below). These calculations show on the 1099-Q worksheet. If the taxable amount is some percentage (10.55%) of the total distribution, it's also some (different) percentage of the earnings.
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 $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
I had the same issue last year with Turbo tax. I followed the guidance and did not report 1099Q on my tax return. I got a letter from IRS showing that I have to pay the taxes on the earnings part of the 1099Q distribution. Then I have to send detailed expenses to prove that it was spent on qualified expenses.
Turbo Tax please fix this issue in your software. Not reporting 1099Q in tax return is not a solution.
" Not reporting 1099Q in tax return is not a solution".
Yes, it is. 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. So, even if you managed to get TT to calculate your taxable portion as 0, you woulda still got that same IRS letter. I know that for a fact, as I did it that way and got that IRS letter. I sent them copies of the school's billing statements. That took care of it.
Another user reported that he forced TT to report the taxable amount ($0) on to line 8, of Schedule 1 and still got the same IRS letter. At least two other users have reported receiving a CP2000 letter, from the IRS, on 529 distributions. They replied that their child was in college and the distributions were for qualified expenses, which they listed, but they did not provide receipts.. They later received a notices saying they were in the clear. We have noticed, here in this forum, that the number of 1099-Q notices, from the IRS has dropped off significantly in recent years. Yours is actually the most recent one we've heard about. Please let us know how it is resolved.
@Hal_Al I'm honestly a bit dumfounded by the recommendations to just leave out certain forms when the interview is asking about them and doesn't give any guidance on when to leave them out.
Seems like a hole in the question/entry process in turbotax, doesn't it? How is a user supposed to know this without searching through web based Q&A when things seem to indicate a taxable event when none is expected?
Can this be fed back to the team responsible for the Q&A session for 1099-Q for future improvements (if you have that ability)?
Q. Can this be fed back to the team responsible for the Q&A session for 1099-Q for future improvements (if you have that ability)?
A. been there. Done that. They're aware of the problem.
Saw this thread and I'm not certain the original problem was addressed. I ran into the same issue and after a lot of troubleshooting (and help from TT customer service) found out that the 1099-Q must be fully entered before the 1098-T. There's no logical reason why, but fixing the order of entry worked for me.
Here are two threads on the issue:
Why 1099-Q form increased my tax?
Tip when entering 1098-T with a corresponding 1099-Q