"Early Distribution" Error on 529 withdrawal?

[johnwc]

I'm filing my California taxes and I came to this page, "Additional Tax on Education or Able Distributions". 

With the following detail, "Your distribution of $*** is subject to the additional tax on these distributions. You owe additional tax of $*** on this early distribution."

However, the distribution is not "early"...it was a fully eligible withdrawal for higher education expenses. 

I've searched through the discussions are quite a few similar posts noting k-12 expenses and some CA/Fed tax law inconsistencies but nothing matching up to my situation.   

I can switch to the form and just enter in the amount that is not subject to additional tax but thought I should post here to see if anyone has any input. 

Thanks in advance for any assistance. 

[KrisD15]

California views distributions to pay K-12 expenses as Non-Qualifying. 

Source

[johnwc]

Yes, K-12 is non-qualifying...understood. However, my distribution was a fully qualified higher education expense. I'm not sure if this is a Turbo Tax error that I should work around or if I'm missing something.

Thanks!

[DawnC · Accepted solution]

Have you entered the higher education expenses yet?   It will show as an early withdrawal until you enter the qualifying expenses.    If the distribution doesn’t exceed the amount of the student's qualifying expenses, then you don't have to report any of the distribution as income on your tax return. If the distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return. When you pay a student’s school expenses with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense.

For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return. However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well. Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants. For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant, and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000. Your adjusted expenses are $8,000—which means you don’t have to report any education program distributions on your tax return.

Related Information:

• What are 529 plans?
• Can I deduct contributions to a 529 plan?
• Where do I enter Form 1098-T?

[johnwc]

This is very helpful, thank you. 

I haven't entered in the higher education expenses yet, I guess haven't gotten there yet. 

But the situation you describe (in great detail, thank you!) looks like it is going to present something of a problem for me given the odd transaction sequence:

• the school posts tuition amount,
• I withdraw the amount from the 529 and pay tuition,
• the school system (Univ of CA) posts the grants a few weeks later and issues a refund for the overpaid tuition.
• I take the refund and put it back into the 529 assuming I'm in the clear for tax liability.

But it looks like I'm not going to be in the clear for the liability given the way the State calculates it. It's not a lot of money but it's an arcane way to get $ drained off. 

Thanks again @DawnC !

[KrisD15]

The TurboTax program will ask if you return any of the funds to the account within 60 days, so the program should handle that portion of the distribution correctly as well. 

[johnwc]

That's great news, thank you @KrisD15! I guess I should have been more patient w/the program, it sounds like it would have all worked out as I clicked through the screens.