Education Expenses - IRS required reporting?

[jazzmo]

Scenario:

Have  daughter who is a full time student in college.

She can be claimed by me as a dependent (she does not provide 1/2 of her support).

She has earnings of approx. $12,000.

My income exceeds the AOTC cap- so I'm ineligible. Besides, 529 fund $ were used to pay for qualified education expenses (QEE).

The following 1099-Q (rounded $)  were generated by my 529 Plan (I'm owner- she is beneficiary):

> $20,000 (pd. to college -and issued in my daughter's name). 

> $14,000 issued to me (which was used to pay for off campus room, board and books).

She also received Form 1098-T from the school indicating $24,000 (Box 1-Amts paid) and $4,000 (Box 5-scholarships).

As read from other questions, navigating thru TT questionnaire and worksheets are complicated. (It says that her scholarships are taxable -and they are not).  So here are my questions:

1. It seems that so long as I can justify my 1099-Q proceeds are justified by QEE, that no entries need to be made on either my or daughter's tax return- correct?

2. Would the 1099-Q issued in my name automatically trigger an inquiry by the IRS? Or should I dissuade an inquiry by providing the IRS with a supporting statement or worksheet? And if so, mechanically how do I do this in TT Premier Desktop?

And, a  deeper dive...if you're up for it: 

3. I understand that if student lives off campus, the avg. room and board charge published by the College can be used.  What if off campus room and board was of higher cost? 

   a. Would IRS allow it?  What about deposits made to secure the following year's lease?

   b. If I completed the TT Smart worksheets, is the program sensitive enough to know that amount published for each school (would seem unlikely, right?)

4. For future years, if I don't actually claim daughter as a dependent ( I get no tax benefit from it, due to my income level), can she claim the AOTC as long as I don't use 529 funds for amounts claimed for AOTC?

Thank you so much in advance for taking the time to read and respond.

[NCperson]

Let's look as sources and uses as i don't think we have the complete picture.  It is easier since there is no AOTC involved and i assume that is because your income is greater than $160,000. 

The sources are $20k to your daughter / college and $14k to you

The uses were the $20k (net of Box 1 and Box 5) on the 1098T form 

so we need to identify another $14k of uses. 

1. It seems that so long as I can justify my 1099-Q proceeds are justified by QEE, that no entries need to be made on either my or daughter's tax return- correct? YES and we need another $14k to do that

2. Would the 1099-Q issued in my name automatically trigger an inquiry by the IRS? Or should I dissuade an inquiry by providing the IRS with a supporting statement or worksheet? And if so, mechanically how do I do this in TT Premier Desktop? it doesn't get reported in any event.  it is not required by the IRS - it's the way they roll.

3. I understand that if student lives off campus, the avg. room and board charge published by the College can be used.  What if off campus room and board was of higher cost? You are limited by the lower of the actual cost or what the college publishes. See IRS Publication 970, page 58, item 3 on the left side of the page.  This stops someone from staying in a 5 star hotel for the entire semester, eating steak and lobster via room service every night and claiming it as a qualified expense for the 529 distribution!!!!!!

   a. Would IRS allow it?  What about deposits made to secure the following year's lease? a deposit is not an expense.it can be an expense later if it is forfeited

   b. If I completed the TT Smart worksheets, is the program sensitive enough to know that amount published for each school (would seem unlikely, right?) 

4. For future years, if I don't actually claim daughter as a dependent ( I get no tax benefit from it, due to my income level), can she claim the AOTC as long as I don't use 529 funds for amounts claimed for AOTC?

Thank you so much in advance for taking the time to read and respond.  while you certainly have the right not to claim your child, the child has a different dilemma (the IRS is deviously smart!)  It will ask the student CAN SHE be a dependent of another, not IS SHE a dependent of another.  Since she CAN BE, she isn't eligible for AOTC herself. 

[jazzmo]

Thank you NCperson  for your helpful and timely response.  To close the loop,  "uses" for the $14K in Plan 529 distributions to me were to pay for off-campus, housing (incl. utilities and internet) and food.

[NCperson]

agreed , as long as you have documentation of at least $14k of these things for your records, just keep it filed neatly together in case the IRS ever comes knocking. 

[Hal_Al]

This is simple.  Do not enter the 1099-Qs and the 1098-T on either your return or hers.  

Both the 1099-Q and 1098-T are informational documents. The numbers on it are not required to be entered onto your tax return. Receipt of a 1098-T frequently means you are either eligible for a tuition credit or deduction or possibly your student has taxable scholarship income.  But, in your case, you know that you have  neither.

You can just not report the 1099-Q, at all, if f your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the 529 plan 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, in case of an IRS inquiry.

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." 

[Hal_Al]

A student, under 24 cannot claim the (up to ) $1000 refundable portion of the American Opportunity credit (there are exceptions but your student does not qualify). There is a provision that allows the student to claim the non refundable tuition credit himself, but then the parent has to forgo claiming the student as a dependent (and the $500 other dependent credit). For this to work, the student would have to have a tax liability to take the credit against.  Since your student only has $12,000 of income, this is unlikely.