How to split 1098-T qualified college expenses between parent and dependent child (AOTC and excess 529 funds)

[ajh2868]

In Turbo Tax, how would one enter the 1098-T for a dependent child to allow the parent to claim the American Opportunity tax credit, while still allowing the child to record qualified expenses that he/she paid using 529 funds?  I would like to use $4,000 on my return to claim the American Opportunity tax credit, while allowing her to use the remainder of the qualified expenses to offset the 529 withdrawals reported to her on 1098-Q.

[Hal_Al · Accepted solution]

Enter the 1098-T on your return. Ignore the 1099-Q, on your return. When you get done TurboTax (TT) will give you the AOTC and indicate that $4000 was used to claim the credit.

When you do her return, enter the 1099-Q first. Then enter the 1098-T. You will eventually reach the screen "amount used to claim the education credit". If TT has not prepopulated that with $4000, you should enter (or change to) $4000.

TT will not try to give the tuition credit to your daughter, on her return, if you indicate, in the personal info section, that she is claimed as your dependent.

For a full explanation read on (but it appears you already understand the specifics)

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For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the 1099-Q can be either the owner or the beneficiary depending on where the money was sent. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient".
The 1099-Q gets reported on the recipient's return. The recipient's name & SSN 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 QTP. 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 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 (not yours), 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)

http://turbotax.intuit.com/support/iq/Education/Information-about-Form-1099-Q/GEN12272.html

[ajh2868]

Great explanation.  Exactly what I was looking for.  Thank you!

[care0_jm]

You cannot split a form 1098-T, since she is being claimed as a dependent then the full amount of the 1098-T would go on your return.

[ajh2868]

Let me rephrase ... How does one split the qualified expenses?  The 1098T, as I understand it, is strictly an informational form that is not even sent to IRS.  I have the detailed billing from the university.  The 1099-Q is in the child's name. and the distributions were used to pay qualified expenses (beyond the $4,000 payed out of pocket by the parent).

[Hal_Al]

You are correct, the 1098-T is only an informational document. But, the IRS does get a copy and uses it to at least verify the people claiming the tuition credit had expenses.

[care0_jm]

I am aware of this Hal_Al I'm by profession a Tax Accountant with 4 years CPA firm experience. I never said that it was not received by the IRS nor did I state that it was not information. I merely answered their question in the simplest form which is that they cannot split a 1098-T between her and her daughters return. Especially since she is claiming her daughter as a dependent.

[care0_jm]

ajh2868 the expenses cannot be split either, the 1099-q should be listed with your return noting the expenses that it offset, the fact that your child's SSN is on the form makes little difference especially since their SSN is also listed on your return as heir dependent.

[Pattywperry]

Thanks for all the info @Hal_Al .  I followed your instructions https://ttlc.intuit.com/community/college-education/discussion/how-to-split-1098-t-qualified-college... on my 2018 taxes (just filing now but they owe us a refund).  The software worked just like you described but our situation is different so I wanted to double check w you before filing.

Here's the 2018 situation.  We received 2 1099-Qs. My husband's was for $2000 and my daughter's was for 15,850. The 1098-T says 15,500 in box 1 and 3,000 in box 5 (Net Tuition & Fees 12,500.   It  has box 3 checked (educational institution changed reporting method) and Does not have a check in the box about including expenses from Jan-March 2019.  

Here's what I did:  I enter the 1098-T on our return (for AOTC).  My HUSBAND got a 1099-Q so I also entered that (ignored my daughter's 1099-Q).  I put in her other school expenses in as well so that it was clear that the 2K 1099-Q was not taxable.  

Did my daughters return.  Entered the 1099-Q then the 1098-T and her other expenses.  Put that 6K was already used on our return.  Did I do this right?  Also should I go in to our return and take out all her expenses above and beyond the 1098-T?

I have ANOTHER question on the 1098-Ts I am getting and how to coordinate with 529 withdrawals.

A lot of details below.  I hope it makes sense.

Sarah started school in Fall of 2016 and gets a 3K per year merit scholarship (1500 per semester).  She was on campus in the dorms Freshman and Sophomore year and Off Campus Junior and Senior year.  Will graduate this Spring.  We took AOTC in 2016, 2017, 2018 and will in 2019

in 2018 we paid the 12,500 reflected on the 1098-T PLUS $6,250 (2 payments of a 4 payment plan (Nov, Dec, Jan, Feb)) for Spring 2019. 

Every year we take the AOTC we are very careful to pay 4K in Tuition and only reimburse from the 529 over and above that.  She has enough other expenses for 2018 (she lived off campus in the Spring) for us to take the tax credit AND for $ on both 1099-Qs to not be taxable whether or not we count the 6,250 we paid for Spring 2019. 

The 1098-Ts are really confusing to me.  Does not match the bills for Tuition and fees and numbers are all over the place.  

2016  Box 2 23.6K  Box 5 1500 Box 7 (includes $ for Jan-March 2017) is checked.  Fall 2016 Freshman Year

2017  Box 2 - 25.6K Box 5 3K Box 7 checked - Freshman Sp / Sophomore Fall

2018 Box 2 15.5 Box 5 3K, (Net 12.5K) New Reporting Method and does not include Jan-March 2019 - Soph Spring / Jr Fall moved off campus

2019 Box 2 33,187.50** Box 5 3K - Box 7 checked off.  **Tuition and Fees for Fall 2019 and Spring 2020 were 30,400  Jr Spring / Sr Fall

2020  - Are we going to get one since they never put the last 1500 in Scholarship anywhere? - Sr Spring

The 2019 1098-T is HUGE.  I have no idea where they got that 33K number and we didn't take enough from the 529 to even make a dent in that.   Do you have to take $ out of the 529 in the same year as the 1098-T says you paid?  We would like to get some more money out for 2019 retroactively. 

Thanks in advance.

[Hal_Al]

Room & board are qualified expenses for a 529 plan withdrawal, even if living off campus.  you may use the lesser of actual cost or what the school charges on campus students.  Books & computers and other course materials are also qualified expenses.

[Pattywperry]

Thanks for answering @Hal_Al .  I know that all of those expenses are OK for the 529.  What I am asking about for 2018 is if the expenses on both returns have to match and/or if both need to add up to the total.  Do they coordinate the numbers?  Here's what I mean: 

On our return I put the 1098-T and my husbands  2K 1099-Q.  The 1098-T  made it so that we got the AOTC and the 2K 529 withdrawal was not taxable.  I also put in her other expenses (not sure if I should have)

On my daughter's return I put  HER 1099-Q  which was fully taxable at first and was more than the amount on the 1098-T.  Then I put in the 1098-T and her other expenses and indicated that 6K was used on our return.  After all of that was done none of her 529 distribution was taxable. 

Do I have to reconcile this in any way?  I know you said that the 1099-Qs are not reflected on the actual return but I am not wanting to raise any red flags (especially as a late filer). 

Also do you have to take 529 withdrawals in the same calendar year as the 1098-T says you paid and as you incurred other expenses?  Our 1098-T's are totally messed up and we didn't take nearly enough out in 2019 based on what the 1098-T says.

Thanks again

[Hal_Al]

Q. Do I have to reconcile this in any way?  

A.   No.  There no reconciliation required on any tax forms.  Yes, you want your own records to be reconciled and you have apparently done that.

Q. Do you have to take 529 withdrawals in the same calendar year as the 1098-T says?

A. No.  But you do have have to take 529 withdrawals in the same calendar year as you actually paid expenses.  That is, you go by your own records, not the 1098-T. 

Q.   I am not wanting to raise any red flags (especially as a late filer). 

A. Red flags can not be avoided, since the IRS does not have a form for reporting the 1099-Q and showing your calculations.  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.  When you claim a tuition credit, you submit form 8863. When you claim savings bonds for education, you submit form 8815. When you claim you used all you 529 distribution for education, you submit nothing.  You simply omit it from your return.

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.  I, personally, received a CP2000 for a 529 plan distribution. I simply provided copies of the school's billing statements as proof and was cleared.

[Pattywperry]

Thanks @Hal !  You're the best 🙂  Really appreciate your expert advice and speedy responses.