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Education expenses

Hi. I received a 1099-Q form, listing distributions that I took from a 529 account to pay for education-expenses for my daughters - both are in college and my dependents. 

The form lists

1. Gross distribution

2. Earnings

3. Basis

and then states that the recipient is not the designated beneficiary. My question is:

DO i need to enter this form into my tax declaration even if all the distributions were used for qualified college expenses??? When I entered the form in my declaration, it triggered additional tax money to pay although these distributions should NOT be taxable. Can  you clarify this?

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1 Best answer

Accepted Solutions
AmyC
Employee Tax Expert

Education expenses

No, do not enter it. If you enter the form, the program assumes you have a tax liability and starts looking since it should not be entered if there is not a tax liability.

IRS Publication 970, Tax Benefits for Education states:

If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions.

 

It becomes more emphatic on Page 45: Don't report tax-free distributions (including qualifying rollovers) on your tax return.

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5 Replies
AmyC
Employee Tax Expert

Education expenses

No, do not enter it. If you enter the form, the program assumes you have a tax liability and starts looking since it should not be entered if there is not a tax liability.

IRS Publication 970, Tax Benefits for Education states:

If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions.

 

It becomes more emphatic on Page 45: Don't report tax-free distributions (including qualifying rollovers) on your tax return.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
Hal_Al
Level 15

Education expenses

You said "I received **a** 1099-Q form, listing distributions that I took from **a**529 account to pay for education-expenses for my daughters - both are in college and my dependents."

 

That seems to  indicate that you took money from a single 529 plan account and used it to pay expenses for two different students.  You can't do that. The part of the distribution that paid expenses for the 2nd daughter (the one who isn't the beneficiary of the account) is a non qualified distribution. 

 

"You may use a single 529 plan account to save for more than one child if you, as the account owner, change the beneficiary when it's time to pay for your next child's college expenses."

 https://www.savingforcollege.com/article/pros-and-cons-of-separate-529-plans-for-two-or-more-childre....

 

 

 

 

Hal_Al
Level 15

Education expenses

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

 

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board which is only qualified for the 1099-Q)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (on the recipient’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

 

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. 

Education expenses

Ah! I did not know that a single 529 college fund can only have one beneficiary. What is the easiest solution to this? Generate a different account for the second daughter OR indicate that the existing account has 2 beneficiaries?

What it recommended?

Thanks

Hal_Al
Level 15

Education expenses

Talk to the plan administrator about your options.  It may be possible to roll over part of the existing plan to a 2nd plan for the sister. 

 

The plan cannot have 2 beneficiaries. That's not an option. 

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