When I entered a 1099-Q I received from a parents' 529 plan of which I am the beneficiary, TurboTax included the earnings in my income and it reduced my refund. However, the entire distribution was sent directly to my school for qualified education expenses, so is not taxable. I tried also entering my 1098-T, but this caused TurboTax to add the AOTC, which I know I don't qualify for because the tuition was paid from a 529. Adding the 1098-T didn't even remove the 529's earnings from my income!
What is the correct way to handle this situation? Do I not file the 1099-Q, because the entire amount was used for qualified education expenses?
I am claiming myself, and will not be claimed as a dependent on my parents' return, if this is relevant.
The issue is caused because you did not work through the education section in the order it is designed and intended to be done. You need to start at the beginning of the education section and work it through in order. Only then will you be asked for room and board expenses that any excess 529 funds would be applied to.
Scholarships/grants are applied to *qualified* education expenses ONLY. Those qualified expenses are tuition, books and lab fees. That's it. (though the definition of lab fees is rather broad). After that, any excess scholarship money is taxable income to the student. Grants/scholarships can NOT be used for room and board. (Do not confuse this with employer provided assistance)
Next, 529 funds reported on the 1099-Q are applied. First to any tuition not covered by scholarships. Then it's applied to the unquailed but "allowed" expense of room and board. Then if there is any 529 money left over, it's taxable income to the student.
Carl is correct but it is very important to reduce the default number for education credit expenses. Turbo Tax defaults to the entire amount for education expenses for the deduction amount. This must be reduced (to zero in my case) so that the valid 529 distributions were not taxed.
Hi Joe - I am having the same core problem. Where do I reduce that to zero?
What "default" are you referring to? The 529 funds are reported as taxable income "initially" in the tax year they are paid/received. Their taxability is offset by the qualified education expenses that money is used to pay for, in the same tax year that money is paid/distributed.
What tax year it pays *for* doesn't matter. But the funds must be used to pay those qualified expenses in the same tax year they are paid out of the 529 account. So if funds were paid out in say, Dec of 2016 and not used to pay qualified expenses until 2017, then on the 2016 return it's taxable income. Period.
That means in 2017 the taxes you paid on those funds the previous year will be offset because you would have then used out-of-pocket money to pay those expenses. However, it can hurt you if you withdraw in 2016 with the intention of paying room & board expenses in 2017. R&B is not a deductible out of pocket expense.
To avoid this issue, what you can do is on the screen that asks "Did [student]'s aid include amounts not awarded for 2016 expenses?" indicate the amount of the 1099-Q funds that was used to pay for 2017"room and board" expenses, that were actually paid in 2017 with those funds. Then on the next screen you're asked if you paid for room & Board with a "SCHOLARSHIP OR GRANT". Select NO, because you did NOT use scholarship money or grant money to pay room and board. (You used 529/Coverdell funds for that)
Here is the problem I am having. I am the parent and owner of a 529. All (for one college student/child) and a portion of the other students earnings are coming through as taxable income. I can't figure out why. I have education expenses that match the 529 withdrawal and I am not eligible for any other education credit or income deduction due to income level.
I can't figure out if Turbo Tax is applying some of my education expenses for education credit expenses credit....and if so, how to change it.
The 1099-Q comes to my SS # and the 1098T for the kids, but I have them both input in Turbo tax for the income and expenses.
I also noticed that I overpaid tax last year with this same situation....about to switch tax software if I can't figure it out.
I can understand the frustration. But threating to switch will not make things work right, or suddenly provide understanding either. So let me ask you this. Whose SSN is listed in the "recipient's tax payer identification" box? It "should" be the student's, and there can only be one student listed for each 1099-Q issued. I am also assuming you have two dependents in college in 2016 also, based on your reference to "the other student".
Don't know if the below will help at this point, but read it and pay special attention to the next-to-last paragraph.
1099-Q Funds
First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to line 21 of the 1040 with an annotation of "SCH" next to it.
Next, 520/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is transferred to line 21 of the 1040 with an annotation of "SCH" next to it.
Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.
***When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.
Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over that are taxable, then while the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.
There is another thread that helped. I appreciate your help too. Turbo Tax applies the education expenses towards a credit that o can't take. The other thread helped me figure out that I had to 0 out that field. Order didn't really matter.....finding that field buried in the education expense section was the key.
You may find this informative to. Do it, just so you're aware. You don't need to change anything if you don't want to. In the search box enter the word LETME and click the search or find button. Then the "jump to" link. After a few clicks you'll see all the credits you qualify for, and can change the one selected for you by the program, if you desire. Pretty neat I think.
@ Farney: Which field is "that field" that needs to be zeroed out? Thanks
Go to Deductions and Credits.
Expenses and Scholarships (Form 1098-T).
Choose the student (will have to do for each one if more than one student) to edit.
On the "Here's your education summary" screen choose to edit the Education Information (last item on screen)
Scroll though/answer questions until you are on the "Amount Used to Calcualte Education Deduction or Credit". I zeroed out "that field" since my AGI eliminates those benefits. This allowed my education expenses to match my 529 plan withdrawal and eliminate any additional tax liability.
Hi carl. I didn't change my 1099-Q amount. Nor my qualified education expenses. That field, simply takes away using education expenses for a credit and/or deduction which I am not eligible. My expenses and 529 withdrawal match - but turbo tax was increasing (incorrectly) my tax liability.
Oh okay. I'm sorry, I misunderstood, and had it backwards. I though you were trying to indicate to the program that you did qualify for a credit, and in reality you didn't. LOL!
Carl, Farney: THANK YOU. The procedure you described allowed Turbotax to properly offset my 529 distribution against qualified expenses even though my AGI disqualifies me for some of the other credits/deductions. AGI should not affect the basic 529 to qualified expenses offset, including the earnings component. INTUIT: This part of Turbotax 2016 is seriously whacked and may be costing your customers excess taxes if they don't notice that AGI includes the earnings part of the 520 distribution but there is not later expense offset. I have gone through the Easy Step on this about 4 times and would be happy to illustrate where the program goes awry.
Totally agree. Debating a re-file on last years that cost me over $500 in tax money. Very disappointed in the product on this one. Glad it helped ashburn_jim!
I caught this last year and told Intuit, but they did not fix it. Called them this year and pointed out the same issue with that interview question where you have to put 0, otherwise you will pay a higher tax. The Turbotax tax adviser that I spoke to totally agreed with me and even told me to post something here in the AnswerXchange to let others know. She said she didn't think it would get fixed this year because it isn't a high enough priority because it doesn't affect enough people. I asked her to put in a request for a refund for the cost of Turbotax because they did not maximize my refund like they guarantee - quite the opposite.
Farney, THANK YOU from me too. The process above worked for me also. I have two kids in college, a 529 for each. I pay the expenses out of my savings account, and at the end of the year I reimburse myself by taking the appropriate amount out of each 529 and paying it directly to my bank account. I am the recipient and my SSN is on the 1099-Q as recipient. The "income" from the 529 matched the expenses i entered and there was no tax impact due to earnings, and it worked even tough my income is too high to take any of the other educational credits. I agree turbo tax needs to fix this. Thanks to those who share their solutions here.
The process worked for me too. I zeroed out "Amount Used to Calculate Education Deduction or Credit" since my AGI eliminates those benefits. I called Turbo Tax with no success. Many thanks for all the help from the group. What a relief!
In 2016 I used a 529 account and cash to pay for my freshman's fall/spring college expenses - tuition/room/board/computer.
In February she was retroactively awarded a 4-yr ROTC scholarship (yea!). I just received reimbursement for fall tuition from ROTC - spring semester reimbursement is pending.
Do I claim the ROTC scholarship in 2016 or in 2017. One or both semesters?
If in 2016, will I (or my student) have to pay taxes on the proportional share of 529 interest earned on the 529 payments that were in excess of qualified expenses? Any penalty on excess distributions? Thanks.
I'm pretty sure if you have scholarship you pay tax on excess distributions but no penalty. This impacts me too. Not sure how you handle scholarship for 2016 received in 2017. That would be something I would have to research. FYI: part of scholarship that covers room and board is taxable.
Basically, scholarships are reported in the tax year they are received. It doesn't matter what year it's *for*. Likewise, tuition and other qualified expenses are reported in the year they are paid, and it doesn't matter what year they pay *for*.
Keep in mind that colleges work in academic years, and the IRS does not. So the reality is, it takes 5 calendar years to get that four year degree. Overall, everything works out in the wash at the end of 5 calendar years.