I took a distribution from my ESA for $2000 in December 2020. In January 2021 I paid for my tuition with the $2000. I received my 2020-1099-Q showing the $2000 distribution & my 2020-1098-T shows $0. Will I get taxed the 10% penalty because the tuition expense was not incurred in the same calendar year as the distribution? If so, is there anyway I can reconcile this to show the IRS that I used the $2000 towards my tuition so I am not penalized?
Thank you!
Technically, to be a tax free distribution, the money must be taken out in the same year that the expenses were paid. The IRS does not match your 1098-T to your 1099-Q. You do not try to "show the IRS" anything at tax filing time. That comes later if you receive an IRS letter.
Room and board are also qualified expenses for an ESA distribution, even if you live off campus. You must be a half time or more student.
The 1099-Q is basically an informational document, it does not have to be reported on your tax return.
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. 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."