Form 1098T combined undergraduate and graduate expenses and scholarships

[mrcmrcmrc]

Have a 529 plan which paid daughter's final undergraduate semester in Spring 2023. She went to same school in the Fall 2023 as a graduate student. The 1098T  combined both undergrad and graduate expenses and combined scholarships she received as undergrad and graduate student. She received a 1099Q which only pertains to her undergraduate semester. How can I link the 1099Q distribution/earnings  to only her undergrad expenses and scholarships? Do I create in TT two 1098T's? 

Thanks 

[Hal_Al]

You said "She received a 1099Q which only pertains to her undergraduate semester". That's not how it works. The 1099-Q can be claimed against any expenses incurred during the same calendar year.  

You do not need  to create two 1098-Ts, nor do you need to separate the expenses between graduate and undergrad.   TurboTax will simply only use the amount of expenses needed to claim each tax benefit (tuition credit, tax free 529 distribution, tax free scholarship). 

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. 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. 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 also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

References:

1. 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." 

1. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

You may qualify for the AOTC (unless you already claimed it four time in the past).  Although grad school doesn't normally qualify,   Grad school in the fall does count if the student finished his undergrad degree in the spring, The technicality is that you had not completed the first four years of post-secondary education as of the beginning of the taxable year.

Provide the following info for more specific help:

• 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 1099-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 on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• 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)?
• Have you claimed the American Opportunity Credit (AOTC) 4 times in the past?
• Is the student a degree candidate attending school half time or more?

____________________________________________________________________________________________

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. 

[mrcmrcmrc]

The problem as I see it is that TurboTax is using all of the educational expenses and offsetting scholarships when calculating how much of the 1099Q earnings are taxable. Supposed to only use educational expenses/scholarships attributable to the QTP (1099Q). If I do this then much less of the 1099Q earnings are taxable. Adjusted qualified expenses for both under grad and grad amount to $1,000. For Under grad it is $3,000. Grad school comes out as $(2,000). This is due to scholarships.  There are no restrictions on how the scholarships are used.

Overriding TT is not easy and there are many places that I need to override. Then when I do the TT Smart Check I get warnings about my overrides and leads me to believe that the electronic filing will fail or that I might have missed other overrides I should have made.

[DawnC]

You only need to pay tax on the amounts not used for qualified education expenses.   If she had more expenses than the 1099-Q reports, don't enter it.   1099-Q Guide

If the distribution doesn’t exceed the amount of the student's qualifying expenses, then you don't have to report any of the distribution as income on your tax return. If the distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return. When you pay a student’s school expenses with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense.  

[Hal_Al]

You don't need to use override, but you may need to adjust your entries. 

There are three things you can do with your Qualified educational expenses (QEE):

1. Allocate then to scholarships (so that the scholarship remains tax free)
2. Use them to claim an education credit
3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, but it doesn't always do a very good job if you want something different. TurboTax allocates QEE, in that order, until you tell it otherwise.  It's best if you have some idea of the outcome expected, when you make your entries. 

Provide actual numbers and I'll tell you how to do that. It's usually best to allocate QEE away from scholarship (up to a certain amounts) and to the credit and 1099-Q.