Getting Turbotax to not put 10% penalty on 529 scholarship withdrawal

[KBSC]

I am having a difficult time getting Turbotax to not put a 10% penalty on my daughter's 529 withdrawal that is based on a scholarship.

Here is the situation:

• 1099Q in name of daughter, full-time college student
• Daughter is my dependent, but filing her own tax return as she has earned income, dividends, and 1099Q.
• I do not qualify for any education credits (income too high).
• Kiddie tax applies.

1099Q specifics:

• $7,000 rollover to her Roth (529 is overfunded), so I am moving money into her Roth. She has earned income of $8,859. 529 has been in place more than 15 years.
• 1099Q shows the Roth transfer correctly as a "trustee to trustee" transfer
• $46,086.92 of other 529 distributions (some to school, others to her for off campus room/board and scholarship)

1098T

• Box 1 $19,695
• Box 5 $16,500

Education expenses (paid by 529)

• Paid direct to school: $13,681
• Room/board paid to offset daugter expenses: $17,744.84
• Scholarship distribution: 14,661.08

My questions:

• Where does 1098T go...on my return or daughter's? I don't qualify for any education credits as income is above cut-off.
• For 1099Q, do I just ignore the rollover to Roth? That is what I have done so far.
• For other 1099Q components, I have tried the straightforward approach and followed TT interview and I have tried the "workaround" with saying student is not the 1099Q beneficiary and then entering her as student, filled in expenses and scholarship manually. Either way, TT only uses ~11K of the scholarship to avoid the 10% penalty. I need help on how to enter correctly.

Thanks in advance. Let me know if more information is needed from my side.

[Hal_Al]

Q. Where does 1098T go...on my return or daughter's? I don't qualify for any education credits as income is above cut-off.

A. Student's. But I'm gonna recommend the workaround, again.

Q. For 1099Q, do I just ignore the rollover to Roth? That is what I have done so far.

A. Yes, particularly if it was on  a separate 1099-Q from the other $46,087.

"Paid direct to school: $13,681" is meaningless unless you identify the expenses it paid; as is "Scholarship distribution: 14,661."

The usable numbers are:

• Box 1 $19,695
• Box 5 $16,500
• Room/board paid to offset daughter's expenses: $17,745
• Add any other identifiable expenses (books and a computer?)

Using the workaround, enter the 1099-Q, on the student's return. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Enter the tuition ($19685), room & board (17745). Also enter the amount of the scholarship (16500) in the box "Tax-free assistance".  This reports the earnings as taxable and claims the scholarship exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later (don't enter the 1098-T). TT will prepare form 5329 to claim the penalty exception. Based on your numbers, you only  get a partial exception, the $46,087 distribution  is more than your $37,440 expenses (19695 +17745). 

[Hal_Al]

@KBSC  said "Daughter ..... filing her own tax return as she has earned income, dividends, and 1099Q."

What are the numbers? Having her declare some of the scholarship taxable (assuming the scholarship is not restricted to tuition) may wipe out some of the tax (but not the penalty) on the 1099-Q. 

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC). 

[KBSC]

Hal_Al, thank you very much for your input!  I'll follow the workaround instructions.

The expenses were consolidated, she did have some books inside the $17,445.

Roth rollover is on the same 1099Q, but it is listed separately. Please let me know if that changes my plan of ignoring it.

You mention I don't enter the 1098T, so I am not entering that form anywhere on my daughter's or my tax return? 

Thank you.

[Hal_Al]

Q. Roth rollover is on the same 1099Q, but it is listed separately. Please let me know if that changes my plan of ignoring it.

A. You can still ignore it. That's the best way, as there is no place to enter the $7000 in the interview (you would have to force it in). Be sure to adjust the boxes 1,2 &3 numbers, when you enter the 1099-Q. 

Q. You mention I don't enter the 1098T, so I am not entering that form anywhere on my daughter's or my tax return? 

A. Correct