Est'd 529 plan for kid who received a scholarship for college. Took distribution but TT continues to report a penalty. Where in TT to avoid penalty bc of scholarship?

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1098-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B charge. If the student lives at home, only the school's board charge for on campus students. 
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student?

Numbers matter and how things are assigned. Example: 

box 1 tuition is $20,000 

box 5 scholarship is $25,000

529 is $15,000

Something has to be taxable, but the amount and which return can vary.

 

Options are:

1. Entire scholarship covers education costs, $5,000 income to student, entire $15,000 529 taxable to owner. Yuck!

2. Entire 529 used for education expenses plus $5k of scholarship. Leaves $20k income to student. Yuck!

3. Entire 529 used for education plus $1k of scholarship, leaves $4k education paid out of pocket for AOTC credit. Student reports $24k not used for education. Worse!

4. 529 used $10k for room and board, $5k to cover education expenses, scholarship covers $15k tuition, leaves $10k income to student. 529 not reported, $10k income to student, winner so far!

5. Some maneuvering of the numbers between to find the sweet spot (as required by IRS). 

 

Things to remember are:

 

Most people are always trying to reduce their income so they subtract box 1 from box 5 and enter the difference. People get a certain mindset, reduce income and making the jump to increase credits is hard for them.

See page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education.

Please see my 529 example with IRS information here.

Tax Benefits for Education: Information Center| IRS