How does turbotax apply Qualified Education Expenses (1098-T Tuition-Grants+Room+board+books) to 529 Distribution (1999-Q) and American Opportunity Tax Credit (AOTC) ?

[turbotest77]

My Education 529 Plan Distribution reported in 1099-Q exceeds the amount of my qualified education expenses reported in 1098-T (tuition minus grants), plus room and board plus book expenses. I also want to take the American Opportunity Tax Credit (AOTC) which for me is $2500 this year 2018. Reading from the internet, the AOTC should count for $4000 of my tuition or 100% of first $2000 plus 25% of next $2000 tuition dollars, the rest I should be able to apply my 529 distribution. Where adding everything my distribution is still less than my qualified expenses. I should be able to apply the rest of my tuition toward my 529 distribution. Turbotax appears to have a bug, when I dig down into the Tuition Summary Form I see the Turbotax is showing $10000 not $4000 qualified expenses for the AOTC. Then when I look at the 1099-Q Form it is showing the the my original qualified expenses minus the $10000 which apparently is where it is taxing me. I figured out how to disable the AOTC in Turbotax, figuring I would now be able to apply my full 529 distribution tax free, but it is still showing my expected qualified expenses minus the $10000? Where does turbotax come up with $10000 deduction? Why is $10000 being deducted from qualified expenses regardless of the applied tax credit? I read something about $10000 limit on 529 distributions for kindergarten/high school, but that is supposedly not true for college when there is no limits. I know I do not have to report my 1999-Q so long as my education expenses are greater than the distribution but that leaves me open for an audit. I would rather enter it all into turbo tax where it is showing I owe an extra few hundred regardless whether I take the AOTC or not. Suggestions, did I miss a check box somewhere?

[KrisD · Accepted solution]

If you enter the 1098-T first, the program seems to default to 10,000 for the possible Lifetime Learning Credit. 

After you enter the forms, continue through the education section and answer ALL the interview questions. 

You'll know your through when you get to "Maximize my Education Tax Break"

After the program makes the calculation, GO BACK to "Education Information" on the "Here's Your Education Summary" screen, re-answer the questions until you get to the last screen will show what is being allocated to a credit. If you are eligible for, (and wish to take), the American Opportunity Tax Credit, change the amount to 4,000.

[turbotest77]

I found this link apparently there is a bug in turbotax going back a few years:   <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4329809-i-am-not-eligible-for-a-tuition-and-fees-deduction-educati...>

[turbotest77]

Using the other thread listed above, I as able to edit the student work info form, Go to View Forms, Student Info Work for the person getting the credit.   Edited Part VI #17 changed from $10,000 to $4000 for the AOTC qualified expense deduction, and it fixed my problem.  For you it may be less or more, but form 8863 should tell you based on which credit you are taking.

[turbotest77]

This is a bug in turbotax it is likely costing people a lot of money, given Turbotax maximum refund guarantee and their 100% Accurate Calculations Guarantee, people could hold them labile for this mistake.  I am sure most people only care when the loss is significant, the fact that the error is likely only effecting taxpayers wallets and not the IRS is why this bug existed for so many years.

[KrisD]

I try to answer the education questions to help people get their full credit. The education section can be very complicated. I have voiced concern and was told that if the customer follows the Step-By-Step process, the 1099-Q is entered first, and the 1098-T later. When done in this order, the program does not default to the 10,000.

I realize you are working in the desktop program so you can adjust the allocation in Forms, but I try to answer using step-by-step instructions since this is an open forum and if someone using the online program searches with this question, they can use my answer. (online programs don't have Forms Mode)

I have worked for Intuit for 3 seasons, and I must say they really do care about the consumer. I will forward your comments to the "Higher Ups".  

Between you and I, I feel the universities should have a mandatory freshman orientation class that covers the 1098-T and available education credits.  (or provide a free parent information class)

Thank you for using TurboTax and always use Answer Exchange for any questions you might have.

[turbotest77]

I appreciate your feed back from Intuit, I have been using Turbotax for years.  this has been my first big issue.

Please do not get rid of the forms!  It is one of the best parts of Turbotax!  Without it is hard to find out where the calculations went wrong.  

Tell your developers to log an enhancement to add a search tool to search forms.  It would make my life easier.   

I agree with you about the education, probably should be done at by the 529 administrators better...  For example I was not aware of the 529 (double dipping) rules with tax credits.  They do make some sense, but the problem is I can not fix a withdrawal I made the prior year when I find out  I qualify for my tax credit, I can't amend my 529 distribution to match whatever credits I qualify the next year.  IRS should allow me to receive or correct my distribution during the Tax Calendar.   

I kind of disagree, about the "step - by - step process, users enter a lot of forms, and it is easy to forget to enter a form in the correct order...  I mean I have gotten burned by this the past three years, I will be sure to do it in the right order next year.  For now I have to amend my old return.

Second, I am a Software engineer, and it seems the problem is related to Education Optimizer method, when it is run it has all forms entered, it should be smart enough to go through all three tax credits and apply the proper adjustment of qualified expenses related to whatever tax credit was applied.  I mean do exactly what I just did, it is a recursive function, first find the proper tax deduction,  then run the function one more time with the proper adjusted qualified expenses.  If it is a sequencing problem, as someone has told you, why cant the software re-sequence once all the forms have been entered or corrected.  I don't know how the online app works, but adding and removing things (out of sequence) like IRAs help me to decide if I will get a IRA tax credit.

Listen I understand this is not a easy problem but it is a defect in the software, there is a solution to this issue and it should not take three years to fix it.