Dependent college student worksheet effects taxfree 529 distribution

[wmatt]

Okay.... this took a lot of trial and error on my part to figure out what is changing the entries.  The result is kind of surprising (at least to me).

Background:

CA resident

claiming adult daughter as dependent (paying 90%+ of her expenses)

took withdrawal from 529 to cover tuition/room/board only (all qualified expenses)

entered 1099q first in income section (see note below)

entered 1098t second in deduction education section

income too high to qualify for education credit (no double dipping)

note:

Apparently you have to enter the data in the order the questions are listed in turbo tax premier.  learned that from some other post on this community searching for solution (post from a couple years ago i think).  

every year i have to battle with turbo tax to get the 529 to not increase my taxes.  my understanding is that if the withdrawals are all for qualified expenses, it should have no impact on tax refund/tax owed.  i think prior year problems may have been the order.  but something extra weird is going on here.  maybe a bug???

for nice round numbers, lets say i have a refund of $100 from fed and ca state each.  i enter 1099q and it goes down.  i enter 1098t and it goes back to $100.  all is good.  after completing everything else in the return still at $100 each (all still good), i then go to review the taxes and it finds errors.  it turns out there are some yes/no questions on depend's "Student Information Worksheet" which are blank.  

Line 3 of student info worksheet is "Was the student enrolled in a program that leads to a degree, certificate, or credential?"  if i answer YES, since she is working towards a bachelors degree, then the program suddenly changes the entries in the QTP section of the 1099-Q form (especially line 2c of the regular tax column) and i lose $2,596 of federal refund and lose $754 of CA refund.  If i answer line 3 of the student info worksheet as NO, meaning not working towards a degree, then the tax refund goes back to $100 each again and all is good.  well... not really because i answered no to the working towards a degree which is not true.

WHY why why is there more taxes to be paid if you are in a degree program??  or is this a bug in the turbotax software?  Why is it a penalty to use the 529 to pay for a college degree?

Please help.  I'm almost done with the taxes and thankfully she graduate this year!

[Hal_Al]

Q. WHY why why is there more taxes to be paid if you are in a degree program??  or is this a bug in the turbotax software?  Why is it a penalty to use the 529 to pay for a college degree?

A.  TT can't handle it. So, just don't do it.

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 (nothing is sent to the IRS). 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! 

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." 

[wmatt]

Definitely NOT double dipping...

when i get the bill from the university it already has the "discounted" price with the scholarship applied.  I pull about 70-80% of the money to cover the bill from the 529 and the rest from our normal accounts.  Everything I take from the 529 AND MORE goes to pay tuition, room and board.  Not even using it to pay any other expenses.

I guess I'm a little naive.  I don't HAVE to enter all the forms I receive?  I thought the IRS gets a copy of all these and wants to see them accounted for on my return.  So you are suggesting not entering the 1099q but still entering the 1098t, right?

It seems like a bug in the turbo tax software if it just can't handle it.  

[wmatt]

From intuit help page:

https://turbotax.intuit.com/tax-tips/college-and-education/guide-to-irs-form-1099-q-payments-from-qu...

it says same thing you did.  1099q doesn't need to appear on my tax forms.  so it seems like a bug that turbo tax is not able to handle it!

[Hal_Al]

Q. So you are suggesting not entering the 1099q, right?

A. Yes

Q. So you are suggesting not entering the 1099q but still entering the 1098t, right?

A. No. Don't enter the 1098-T either, since you are not eligible for the tuition credit.

The 1099-Q and the  1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.

Q.  I thought the IRS gets a copy of all these and wants to see them accounted for on my return?

A. Yes, the IRS gets a copy.  But, when nothing on the 1099-Q is taxable, nothing is sent with your actual tax return.  Same for the 1098-T; if you are not claiming a credit, or your student reporting taxable scholarship, nothing is sent to the IRS when you enter them in TT.