Coordinating 1098-T with Coverdell and AOC

[Green Desk]

The facts as I understand them:

• My husband and I are filing jointly and claimed our daughter (1st yr college student, 18yo in 2024) as dependent.
• Our daughter received a 1098-T: box 1: $16,860, box 5: $1,500 (scholarship awarded by her college for tuition only)
• She also received a 1099-Q: box 1: $5,552 (distribution from her Coverdell ESA)
• Her tuition for the 2024-25 year was $18,000, charged to her account in June 2024.  She was a full-time student from Aug 2024 to the present, working on a 4yr bachelor's. 
• In July 2024, her college applied the $1,500 scholarship to her tuition balance, her Coverdell account sent $5,552 directly to the college towards the tuition balance, and finally she paid $10,948 from her own bank account to pay off the tuition balance.
• She spent $472.51 on books for college in 2024 (not required to be purchased from the school).  This amount counts as an education expense that can be deducted.
• Our daughter must file taxes because the total of her 2024 W-2s and 1099-INT are over $13k.
• My husband and I claimed our daughter's American Opportunity Credit of $2,500 on our taxes.
• Our daughter's Coverdell distribution is not taxable income because her adjusted QEE is greater than the distribution of $5,552.

So, my question is about what to enter and where as I walk through Turbo Tax.  I have two separate returns started in TT: 1) our daughter and 2) my husband and me jointly.  I'm confused about:

• Where do I enter the info from 1098-T?  I'm tempted to enter that info on both ours and our daughter's returns, just to cover my bases.  But is that wrong?  I don't want to claim something double, but I also want to make sure we give the IRS what it requires.
• Also, where do I enter the info from 1099-Q?  On my daughter's because she's the student/beneficiary? or on ours since we are taking the AOC?
• Who takes the $472.51 deduction for education expenses?  Does it matter or does it have to be the person who takes the AOC?

Thanks!

[KrisD15]

The American Opportunity Tax Credit maxes out using 4,000 in education expenses resulting in a 2500 credit.

You say you got that credit so I am assuming you entered the 1098-T in your TurboTax program.

The scholarship and distribution are not taxable because the expenses you listed are far more than the distribution, scholarship and the 4,000 for the American Opportunity Tax Credit. If fact, the distribution could be used for room and board, but it doesn't matter, you got the full credit and there is no additional income that the student needs to claim (besides her wages and interest income).

Any excess education expenses (471.52) are not deductible. Nothing more would be reported. 

Pub 970

[Hal_Al · Accepted solution]

Q. Where do I enter the info from 1098-T?

A. You enter it on your return to claim the AOC.

Q.  I'm tempted to enter that info on both ours and our daughter's returns, just to cover my bases.  But is that wrong? 

A. Yes, in your case. Nothing needs to be entered on her return. The 1098-T and 1099-Q are only informational documents. The numbers on them are not required to be reported.

Q. Also, where do I enter the info from 1099-Q?  On my daughter's because she's the student/beneficiary? or on ours since we are taking the AOC? On our return because we are the owner?

A. None of those. When it has to be entered, it is entered by the "recipient". The recipient is identified as such on the 1099-Q.  In your case, the ESA distribution amount is fully covered by adjusted (for the AOC & scholarships) and does need to be entered at all.*  The interview is complicated and it's easy to make mistakes. Avoid it if you can and you can. 

Q. Who takes the $472.51 deduction for education expenses?  Does it matter or does it have to be the person who takes the AOC?

A.  The person who takes the AOC includes that amount in calculating the AOC. There is no separate deduction. 

*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 don't need it). 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 have effectively done that). You also cannot count expenses that were paid by tax free scholarships. 

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”.
3. ("IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form." 

[Green Desk]

Yes, I entered the 1098-T in both our daughter's and ours as I'm trying to figure this out.  Should I keep it in my taxes (for the AOC) and delete it from our daughter's return?

So, if I feel sure that our qualified education expenses are more than the Coverdell distribution I don't have to include the 1099-Q at all?  Just keep it for our records?

Why did TT ask about Education Expenses in the Deductions section?  Is that just in case we didn't qualify for one of the credits?

Thanks!