Do I include amounts paid with 529 distributions as separate education expenses?

[Anonymous]

I am having trouble understanding whether to include education expenses paid through 529 distributions as separate line items in the education expense area.  I am using TT Home and Biz.

I completed the form 1098-T and two form 1099-Qs correctly.  One 1099Q is for 529 distributions that went directly to the school to pay both tuition and housing.  The other 1099Q was a distribution to me which I used to pay a housing fee.

One complicating factor is that my child's scholarship receipts exceed her qualified education expenses by a significant amount.  But we still paid a large amount from the 529 for both tuition and housing.

If I enter in the data in the forms as led by TT, it indicates I had an excess/taxable distribution from the 529, which is not true since everything from the 529 went to pay either tuition or room and board.

If I enter in the 529 distribution amounts as additional education expenses, ie, the room and board amounts paid by the 529 as room and board expense, and the tuition amounts paid by the 529 as fees, then I get a whopping tax credit.  I'd love to get this whopping tax credit, but I'm not sure I'm doing this right.  Your help is greatly appreciated.

[KrisD]

Was there more scholarship received than education expenses paid in 2017? If so, did the student get a refund? If so, you could not be eligible for a credit, unless you can apply the scholarship to room and board.

[Anonymous]

No, my child did not receive more overall scholarship than education expenses.  Also, the overall scholarship amount did not exceed the total qualified education expenses.

The 1098 does a poor job of splitting out where the scholarship funds are applied.  Basically her scholarship covers the entirety of her tuition/fees and room and board for the regular school year.  But she took part in a special summer program which had both qualified and non-qualified expenses.  She had a small scholarship for that, but we paid the bulk of that expense with 529 funds.  But TT seems ill equipped to handle these kinds of circumstances.  The way the data on the 1098-T looks, her scholarship exceeds her qualified expenses, but that's because the scholarship amount includes the amount which is applied to room and board during the regular school year.

I'm having trouble figuring out how to input this data in TT and accurately reflect that we did pay several thousand in tuition expenses for her summer program.

[KrisD]

Education credits are based only on the tuition, fees, books and supplies. You can use the room and board expense to offset the 529 distribution, but not for a credit. If the scholarship is not restricted, it can be applied to room and board instead to free up tuition amounts for the credit, although that would make the scholarship amount taxable income to the student. Often the student's tax liability in this situation will be less than the credit the parent receives. 

If the 1098-T shows more scholarship payments than expenses incurred in 2017, you could not be eligible to get a credit. Please check the student's school account statement for 2017 to see what was PAID in 2017. Schools often bill in December for the next year, and this can overlap the calendar year. The amount PAID should be reported in Box 1, but some schools report Box 2, what was billed, and this can be deceiving. For example if the school billed in Dec. 2016, but the scholarship posted in Jan. 2017, it could look like there was excess tax-free assistance for 2017.

Also, distributions should always be made in the name of the beneficiary, never the account owner, to avoid tax. Funds can also be distributed to the school directly. Any excess distributions should be taxable to the student only. 

IRS Pub. 970 has some really good ideas on how to make the most of the education tax breaks and credits they offer.

 CLICK HERE for IRS Pub 970 Education Credits