Filing amended return for 2018 to include 1099-q and Turbotax is not consistently accepting room and board

[shresko]

We mistakenly did not include 1099-q for our 2018 taxes.  I am not filing an amended return.  We have 2 1099-q, one for our daughter who we claimed as a dependent and one for our son who we allowed to claim himself as a dependent.  When I enter the 1099-q and the related expenses, we get dinged for excessive distribution because turbo tax say we cannot deduct the education expenses because of our income.  We are not trying to 'deduct expenses' but merely reflect the expense match our 529 distribution.  For our son, we get an easy request to enter the expenses and they offset the 529 distribution so no issue.   How can I reflect that we had the expenses to match the 529 distribution for our daughter so we are not paying tax on an excess distribution that we really did not have?

[Hal_Al · Accepted solution]

The simplest thing is just don't report the 1099-Q, at all, if your student-beneficiary (whether a dependent or not) 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, including form 1040X (amendment). But, it will prepare a 1099-Q worksheet for your records..

You do not need to file an amended return to report the 1099-Q.  In fact, you don't want to.  You will be sending no changes to your original filing. 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." 

That said, your question was   "How can I reflect that we had the expenses to match the 529 distribution for our daughter" The answer is very carefully.  If entered correctly, TurboTax (TT) will handle as desired, producing the required work sheet (which is not sent to the IRS as part of your original return).  If the 1099-Q goes on your return (because you are the recipient), enter it before you enter the 1098-T. The interview process goes smoother.  You may have to delete previously entered info and start the education interview over.  TT may  try to give you a credit or deduction (see full explanation below).  You should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is 0. 

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Qualified Tuition Plans  (QTP 529 Plans)

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 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)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

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

Box 1 of the 1099-Q is $5000

Box 2 is $600

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

60%x600= $360

You have $240 of taxable income (600-360)

**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.

[Hal_Al]

"Our son who we allowed to claim himself as a dependent"

You're not allowed to do that.  If he qualifies as your dependent*, he cannot claim himself, even if you don't actually claim him.

What is it you're trying to accomplish?  With the tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, he usually only qualifies for an education credit or deduction, if he is not a dependent (see exception below). 

If he is trying to claim an education credit, you should be aware that there are restrictions on a student claiming himself and getting the refundable portion of the American Opportunity credit.  A student, under age 24, is only eligible if he supports himself by working, even if he is not a dependent.  He cannot be supporting himself on student loans & grants, parental support and 529 plans.   If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return.  If the student  is using some of the educational expenses to claim a credit  or deduction, the parent cannot claim the same expenses against the 1099-Q (double dipping). 

*A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are considered third party support and not as support provided by the student.
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

[Carl]

one for our son who we allowed to claim himself as a dependent.

For starters, it does not matter if you actually claim your son as a dependent or not. The key word is *QUALIFY*. If you QUALIFY to claim your son as a dependent, then your son *MUST* select the option that he can be claimed on someone else's tax return. If just does not matter if you actually claim him or not.It is *not* common for an undergraduate to not qualify as a dependent on the parent's tax return.

Next, since you did not claim your son as a dependent, that means you can not claim *ANY* education expenses for him. That includes the 1099-Q. Not a single penny. Instead, your son will claim any and all education expenses on his own tax return, including the 1099-Q if he's required to report it.

If your son is the named beneficiary on the 1099-Q, then your son claims/reports the 1099-Q it on his own return if required to do so.

If you the parent are the named beneficiary on the 1099-Q, then you will report it on your return and if not used for qualified expenses (including room and board) for a qualify student that is listed on your tax return as either a tax filer or a dependent, then you will pay taxes on that distribution.

Remember, for the dependency status, the parents are not required to provide any support to the student. Not one penny. THe support requirement is on the student, and only the student. That requirement is:

If the student does not provide more than 50% of their own support, then the parents qualify to claim that student as a dependent on the parent's tax return. Scholarships, grants, 529 distributions, gifts from Aunt Mary, money from parents, and any other third party source of income *does* *not* *count* for the student providing their own support.

[shresko]

The IRS sent us a letter saying we had under reported income due to the 1099-q, which is why I am trying to amend our taxes.  I didn't include the the first time, because the message from Turbo Tax indicated I didn't need to.  However, the IRS seems to have a different opinion.  

[Hal_Al]

You still don't need to amend. We're seeing this frequently (it happened to me, personally). Apparently, the IRS has created a problem by not having a form to report the situation where the taxpayer uses all the 529 plan distribution for qualified expenses, because nothing about the 1099-Q went anywhere on the actual IRS forms.

You should reply to the IRS that it was all used for qualified education expenses. I attached a copy of my billing statement from the school and a copy of TurboTax's 1099-Q work sheet. That took care of it (2-1/2 months later).

At least two users have reported receiving a CP2000 letter, from the IRS,  on 529 distributions. They replied that their child was in college and the distributions were for qualified expenses, which they listed, but they did not provide receipts.. They  later received a notices saying they were in the clear.

[shresko · Accepted solution]

Thank you all for your helpful information!!