Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

[maglib]

@Carl  great information, very impressive, small correction. If the scholarship/grant exceeds by less than 2100, they may still have to file a return as the amount falls into kiddie tax rules and needs to be reported as income, regardless of tax liability.  Yes, it still won't be taxable until it exceeds $6,350. Reporting requires taxable scholarship be included in the kiddie tax, although the standard deduction will offset up to $6350 (assuming no other unearned income or earned income gets added in).

[Carl]

I've not read it in quite awhile, but I think kiddie tax doesn't apply to a college student that is not under the age of 19 on Dec 31 of the tax year. (Or something like that, as it's early morning and I'm to tired to care and go research it before heading out the door to work.)

[Carl]

Memory spark - I think that kiddie tax has to do more with interest/investment income, which a scholarship/grant/529 fund distribution would not be. Something to do with the designation of "beneficiary" vs "investor"

[maglib]

@Carl the taxable scholarship is included for kiddie tax, but because of standard deduction in this case if it was 6350 or less makes income of 0 taxable.  <a rel="nofollow" target="_blank" href="https://www.irs.gov/instructions/i8615#idm140023474969936">https://www.irs.gov/instructions/i8615#id... Income
For Form 8615, "unearned income" includes all taxable income other than earned income as defined later. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust."

[pmeaux123]

Yes, that sounds correct.  My son is paying tax on the portion of his scholarship that covers room and board and exceeds $6350.  The tax is based on our tax rate.  

Note that TurboTax also inadvertently assumed a tax penalty for underpayment of estimated tax.  When I dug deeper into the worksheet, TurboTax had not checked off that my son had no tax liability for 2016 - TurboTax had not asked me this question in any of the interview questions.  When I corrected the worksheet to show he had no 2016 tax liability, it removed the penalty.  I believe it is very important to go through all line items and worksheets to understand how your taxes are computed because TurboTax misses things such as this.

[Carl]

Two cups of coffee and a clearer head now. "kiddie tax" and "taxed at parent's tax rate" is basically saying the same thing. Generally, if the total of all the students income from all sources (including scholarships) exceeds $6,350 after all the deductions are done, then taxes will be assessed on the student's income. If any of that income is from scholarships/grants, then that specific income is taxed at the parent's higher tax rate.

[maglib]

yes, but once over $1050 of money allocated to kiddie tax income, you must file a return even though no tax liability. Taxable scholarships some how become both earned and unearned.

[maglib]

@pmeaux123  during the tax penalty interview, it would have asked you those questions, you may not have gone through the whole interview section.  Glad it worked out for you.

[pmeaux123]

yep.  I eventually found where it asked the question under "Other".  Thanks.

[maglib]

Even if you're a dependent, you'll generally need to file your own 2017 tax return if:

Your earned income (money you made by working) exceeds $6,350, or
Your unearned income (interest, dividends, capital gains, etc.) exceeds $1,050, or
Your business or self-employment net income (gross minus expenses) is at least $400, or
Your gross income (earned plus unearned) exceeds the larger of $1,050 or your earned income (up to $6,000) plus $350.
But even if your income falls below these filing requirements, you'll want to file one anyway if you wish to get a refund for any taxes were withheld from your paychecks.

[maglib]

@Carl you can get a tax credit when all is covered by scholarship or 1099Q (not sent direct to college).  Assume all is covered but you make $4k of the scholarship (if allowed by the rules of the scholarship) or 1099Q income, parent gets AOTC and student pays no tax due to standard deduction.  yes the student has to file but, it is a win/win situation. The 1099Q is not actually reported nor required to be (just the portion not used for qualified education), you just report the excess when the parents return is done TT will tell them the amount reportable as income to the student. TT makes it confusing but you only can get tax credits if you use taxable income and since you made the scholarship taxable (say for room & board), it is usable.  The student enters the amount as scholarship used for room & board with no education expenses and depending on if they have other income, no tax liability, it properly reports it on the student return with SCH....

[Carl]

Seems like going around the elbow to get to the thumb. If the parents claim the student, but the student reports all the education stuff on their return, so long as the student's total taxable income from all sources, including the excess scholarship/529 funds is less than the standard deduction, they still don't pay tax on it.
Or am I missing something?

[maglib]

The student doesnt report the education stuff, the parent only does, the parent reports it all. the dependent Student only reports the amount of taxable income created.  Effectively, the end result is the excess scholarship/1099Q gets reported as it needs to be on the students return as scholarship income with no related expenses (as required for excess).  (the whole process is to just report education expenses paid with taxable earnings on the parents return,  and only excess 1099Q and scholarship on the student).

Only time the student reports it is if the parents are high income earners and get no benefits of education credits or no benefits of claiming their students or the student is no longer a dependent.  Either student is not a dependent or the parent doesn't claim them in these scenarios.

[Carl]

As I understand it (and I've not re-read pub 970 recently) if the amount of scholarships, grants and/or 529 funds exceed the qualified education expenses, (regardless of parent's income) then while the parents still qualify to claim the student as a dependent, it is the student who reports the education stuff on their return. The parents' claim the student if they qualify, but the parents' don't report any of the education stuff. The student does.

[maglib]

but pub 970 does specify the creation of taxable income and even gives examples to get education credits.  Only person claiming the student claims the education expense.  The student only claims excess or personal portion (room & board, transportation portion, etc)on their return.