Grandparent-owned 1098T - who reports?

[CXC10]

With a grandparent owned 529 - does grandparent claim 1099Q on their taxes?  Then how does parent report 1098T on taxes for dependent?  Do we add it and leave box 1 blank?  

[CXC10]

Edited original post already.

[Hal_Al]

I assume you meant Grandparent-owned 1099-Q, not  Grandparent-owned 1098-T.

Your situation takes coordination of the educational expenses with the parent and maybe the student too. You allocate the expenses for the best tax advantage for the family. 

Q. With a grandparent owned 529 - does grandparent claim 1099Q on their taxes?

A. Yes, if the grandparent was the "recipient" and if it even needs to be reported.  See explanation below the line.

Q. Then how does parent report 1098T on taxes for dependent?

A. The 1098-T can be entered on multiple tax returns, with adjustments, as need. 

____________________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent, but could be a grandparent), 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. 

[Hal_Al]

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,  (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
• is the parent trying to claim the tuition credit (are they eligible)?
• Is the student an undergrad or grad student?
• Is the student a degree candidate attending school half time or more?

[CXC10]

First thanks for your quick reply and I am digesting your other response.  

• I now have 2 students with 1098-T's and they are both dependents on my return.
• Students' Grandfather wants to and has reported 1099Q on his return.
• Just realized one of the 1098-T's is incorrect, I believe, as it seems to have included Spring 2024 tuition - it is calendar year, correct, not school year?
• It does have my sons' names and SSN on the 1099Q - most sites say they need to claim, but he is the account owner so he can claim, correct?
• We are not trying to claim education credit only because my dad was including the 1099Q in his taxes.
• Both undergrads.  One lived in dorm, one off campus with living expenses about equal to living on campus.
• Both full time students.

Thanks!

[Hal_Al]

Q. Students' Grandfather has reported 1099Q on his return.

A. He can NOT do that, even though he is the owner.  He cannot do that because he was not the recipient of the funds or the 1099-Q.  The good news is: there is no need for him to file an amended return.   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. All it did was  prepare a 1099-Q worksheet for his records. 

Q. We are not trying to claim education credit only because my dad was including the 1099Q in his taxes.

A. That's no longer valid. What he filed doesn't count (as previously stated, he didn't actually file anything). .  Even if he had been the recipient, it was not the best way to file. Always claim the AOC first, if eligible. 

Q. Just realized one of the 1098-T's is incorrect, I believe, as it seems to have included Spring 2024 tuition - it is calendar year, correct, not school year?

A.  It's correct, if the payment for Spring 2024 was applied to the account in December 2023.  On the other hand it's a frequent mistake the schools make.  You can adjust the 1098-T to match your records. You don't need a corrected 1098-T and based on comments, in this forum, you are highly unlikely to get one. The school will just say they are right (they're frequently not right).

Need numbers to advise you, but here's the basics: allocate $4000 Tuition to the AOC. Allocate all Room & board (R&B) to the 1099-Q. Decide how much of the remaining expenses to allocate to the 1099-Q or the scholarships based on the best outcome. That may result in some of the scholarship being taxable to the student, instead of, or in addition to, some of the 1099-Q being taxable. 

[CXC10]

Replies:

1. Student is parent's dependent
2. Box 1 1098T is $54,629 (other dependent's 1098T is $41,320)
3. Box 5 is $19,810 (other is $13,155)
4. No other scholarships
5. No
6. Not restricted
7. Box 1 1099Q is $42,170 (other is $28,990)
8. Box 2 is $16,459 (other is $13,405)
9. Recipient's are students
10. Room & board paid by 529 roughly $3600 ($300 per month) - other was in dorm and in tuition bill paid by 529
11. All books paid by 529 - roughly $300
12. One paid taxes on income as self-employed (other doesn't have to file)
13. Parent is eligible to claim but may be reduced - right around threshold
14. Students are undergrads
15. Full time students

[Hal_Al]

"other was in dorm and in tuition bill paid by 529"

We need to know  actual room and board amount 

"One paid taxes on income as self-employed"

We need to know How much income he will be reporting. 

For the first student, something is going to be taxable, with or without getting the AOC.  For the second student, nothing will be taxable (but it's close).  More numbers are needed. 

[CXC10]

Room $3890 

Meal plan is $3015

Nonemployee comp $6942.90

[Hal_Al]

Double check my math.

For the first student:

Expenses are 54629 + 3600 +300 =58529  (the $3600 seems low compared to the 2nd student's 3890+3015)

58529 -19810 scholarship = 38719

38,719 -4000 for the AOC = $34,719  expenses left for the 1099-Q. 

42,170 (box 1 of the 1099-Q) - 34,719 = $7451 short fall in expenses

Solution: Student declares $7451 of his scholarship as taxable*, reallocating expenses away from the scholarship to the 1099-Q. Since we have now allocated enough expenses to the 1099-Q, none of the 529 distribution is taxable. Don't enter the 1099-Q at all.  Enter the 1098-T on the parent's return to claim the AOC.  Enter the 1098-T on the student's return, with 0 in box 1 and $7451 in box 5**.  

The 2nd student is easier:

Expenses are 41320 + 3890 +3015 = 48255

48255 - 13155 scholarship = 35100 

35,100 - 4000 for the AOC = $31,100 for the 1099-Q. 

Since that is more than the $28,990 in box 1 of the 1099-Q, none of the 529 distribution is taxable. Don't enter the 1099-Q at all.  Enter the 1098-T on the parent's return to claim the AOC.  Enter nothing about education on the student's return. 

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400).  So, 7451 + 6943 (non employee comp) = 14,394.  $14394 - $13850 (standard deduction) = $544 taxable income ($54 income  tax)***.  The non employee comp (but not the scholarship) is also subject to social security and Medicare tax, in the form of "self employment tax". 

** The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. You  report scholarship income (or claim the tuition credit), based on your own financial records, not the 1098-T.  The easiest way to do that is just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS

***Making $544 less of the scholarship taxable and, instead,  declaring $544 of the 529 distribution as non-qualified saves about $33 in tax, but complicates entering it into TurboTax and generates form 8615.

The math is:

$544 non qualified distribution divided by $43,170 total distribution = 0.0129(1.29%). That means that 1.29% of the box 2 (1099-Q) earnings amount is taxable. 0.0129 x $16,459 = $212 taxable income ($21 tax), instead of $544 ($54 tax).

[CXC10]

You're right sorry Student numbers are wrong:

Student 1

Box 1 is 54,629 but tuition alone was 51,170 and room/board 5,896 with aid of 19,810

Thinking with your calculation, he would report taxes but he already submitted so would need to send amended return?

Student 2

Box 1 is 41,320 but they included Spring 2024 tuition so 2023 actual tuition was 19,700 with 3890+3015 and grant of 13,155.

[Hal_Al]

Yes, an amended return would be required to report scholarship as taxable income.

Spring 2024 tuition, paid in 2023, and included in box 1 of the 2023 1098-T is usually accounted for  on 2023 tax filings. 

Room and board are not included in box 1 of the 1098-T. Although schools were known to make that mistake in the early days of the 1098-T, not so much these days.