My wife is 38 and her parents forgot about an ESA account they had setup as a teen for her. They cashed it out in 2024, Vanguard wired my wife the balance of 7,800 and sent a 1099-Q form for it. The form does not have a cost basis, only an account number in box 3. We called vanguard and they said that do not have the contribution amount and that it is on the contributors to keep a record. My father-in-law stated he contributed $4,00 total to the account. When I put that number into box 3 while filling out my taxes on turbo tax, it does not reduce the tax liability and expects I pay taxes and the 10 penalty on the full amount of 7,800 instead of this amount minus the contributions which is would mean a taxable and penalty amount of 3,800. Does the cost basis not apply in this scenario because it was distributed so late or is turbo tax not getting this correct for me?
Please do this IRS worksheet with your numbers and see how it comes out.
Thank you for the reference. That confirms what we all thought that only half is taxable. Hopefully I can turbo tax to recognize it that otherwise I may have to have a tax professional do my taxes this year.
When you put $4000 in box 3 at the 1099-Q screen, you must also put $3800 (7800 minus 4000) in box 2.
$3800 will get taxed (plus $380 for the 10% penalty).