distributions from 529 in December for Spring semester

[aculyer]

We wired the payment for the Spring semester from our Smart529 in December 2025. As the result of it 1099Q showed 15000 gross distribution. 1098T showed box 1 - Box 5 expenses 10000 as if there was no charge for Spring semester in December 2025! All direct wire payments from 529 were for her dorm room- qualified distributions. Should we report 1099Q on our daughter return, and pay penalty for 5000 excess distribution?

All the distributions were direct wire payments from 529, and we have statements from the account as well as charges and payment history from MIT. 

What should we do?

[Hal_Al · Accepted solution]

Q. Should we report 1099Q on our daughter return, and pay penalty for 5000 excess distribution?

A. No. Payments made in 2025, for the first term of 2026,  make the 2025 distribution qualified. The  1098-T is only an informational document.  If your records say otherwise, and they apparently do, you can ignore the 1098-T. 

Q. What should we do?

A. Nothing, literally. Do not enter the 1099-Q.

The 1099-Q is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated (more so with your situation) and it's easy to make mistakes. Avoid it if you can and you probably can. 

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 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." 

Only enter the 1098-T if you are claiming the education credit.  

The 1098-T is also only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. 

If you claim the tuition credit, you do need to report that you got one.

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T.