I've read a lot of the posts on this topic but I'm still confused.
We disbursed $$ from a 529 Plan to pay for QEE but TT is telling me my son needs to report additional $ as income and my state taxes went up after I entered the disbursed amount with $0 not used for QEE.
By QEE, I am assuming you mean Qualified Education Expenses. Did you enter the 1098-T so the 529 expenses could have something to attach to?
Here's how to get to the 1098-T screen if you haven't visited the Education section yet:
- Open (continue) your return, if you don't already have it open.
- Search for 1098t and select the Jump to link at the top of your search results.
- On the Do you want to enter your higher education expenses? screen, answer Yes.
- Answer Yes to Did you get a 1098-T for the year? and Continue.
- On the next screen, you can choose how you'd like to add your 1098-T. You can upload a digital copy from your computer or type it in yourself. Select which option you'd like and Continue.
From the Education Expenses Summary screen you can:
- Select Add A Student if you need to enter a 1098-T for someone else (and then resume steps 4 and 5 above); or
- Select Edit to revisit the 1098-T for a previously-entered school or Add New School to enter a new 1098-T.
Some important tips about entering this form:
- Parents: If the student listed on the 1098-T is your dependent, enter the 1098-T on your return – even if your dependent paid the tuition.
- Students: If you're not being claimed as a dependent, you can enter the 1098-T on your return regardless of who paid the tuition unless it was your employer. In that case, just keep the 1098-T with your tax records.
- Enter your 1098-T exactly as is even if the amounts are wrong (this is common). You'll get a chance to correct this info and enter additional expenses later in the Education interview.
- Leave blank boxes blank. Don't enter 0 for any blank boxes on the form, as this generates errors.
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There are three things you can do with your Qualified educational expenses (QEE):
- Allocate then to scholarships (so that the scholarship remains tax free)
- Use them to claim an education credit
- Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable. Room and board are additional QEE for the 1099-Q only.
TurboTax allocates QEE, in that order, until you tell it otherwise.
If you know you have enough QEE, for all three, You can just not report the 1099-Q, at all. 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."
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!