How enter 529 excess withdrawal due to scholarship on my and my dependent’s return?

[MojoMom777]

Due to 529 being overfunded, we decided to take an amount equal to one semester scholarship in 2024, in addition to qualified educational expenses. Unclear the correct way to report this on both my taxes and my dependent’s taxes.

Details: 1099Q sent to my dependent - Box 1: 15337; Box 2 earnings $9749; Box 3 basis $5588.

1098-T Box 1 $5758; Box 5 $10,385, Box 8 at least half time student (student full time). NOTE: Box 5 is technically ‘over-stated’ because it includes scholarships for both Spring 2024 and Fall 2024; but because Spring 2024 was paid in December 2023, this scholarship was actually ‘used/applied’ in 2023. But I have no idea how to tell TT this or if it’s important.

Adjusted qualified educational expenses: $10,081

Dependent had a summer internship and earned $9758.

Dependent is age 22 in 2024, FT student who took one extra semester in this last year of college.

4 years of AOTC have previously been used (2020, 2021, 2022, 2023).

Questions:

(1) Where is 1099Q reported? On my return, on dependent’s return, on both?

(2) Where is 1098 T reported (mine, dependent’s, both?).

(3) I did find the worksheet/form on my taxes with the calculation on the amount of 529 excess distribution that should be reported on dependent’s tax return. The calculation was: AQEE of $10,081/ 529 distribution of $15,337 = .6573. Then .6573* 529 earnings of $9749. = $6408 (not taxed). $9749 – untaxed amount of $6408 = $3341 – this is the amount on which my dependent should be taxed, I believe. Note I went into forms view and edited the dependent worksheet to correctly calculate this number. No amount of using the step by step got me there.

(4) Is this amount above, $3341, considered EARNED or UNEARNED income to my dependent? It seems if it is earned, this will not be taxed. If unearned, it will be taxed.

(5) When I tried to enter this in TT for my dependent, I did manage to enter data to try to get it to tax the $3341 as unearned income, but now it stops me every time asking for line 6, Form 8615 from MY taxes, presumably to calculate the kiddie tax? Problem is my taxes have NO DATA in form 8615. Is that right or wrong?

Thank you!

[KrisD15]

Looks like you are saying that the scholarships and tuition pretty much cancel each other out, so are you able to apply the distribution to Room and Board expense? The student does not need to use school housing, but the expense for room and board claimed (even living at home) must be only as much or less than what the school would charge. 

1. The taxpayer claiming the student can enter all education forms into their TurboTax program so that their program can do the math and try for an education credit. 

2. If there is no education credit, the person that was issued the 1099-Q enters that form in their program, and the student enters Form 1098-T if there is taxable scholarship income they need to claim into their TurboTax program.

3. What was the amount the program was coming up with? Sometimes the program will tax more of the distribution in order to claim part of an education credit. If you adjusted the taxable amount of the distribution, please verify that this is not in contrast to a credit (look at your Schedule 3 line 3) 

4. The amount will be considered unearned. 

5. Form 8615 would be on the students return. Form 8615 Line 6 is asking for your Form 1040 line 15. 

[MojoMom777]

Thank you for the reply! I went ahead and deleted this dependent (D2) and started over to re-enter all her data as noted above. 

1. I entered into my TT and am using the full LLC credit of $2000 for my other dependent (D1), so no education credit for this dependent (D2). (4 years of AOTC previously used, and actual expenses are less than the amount taken out of 529 due to intentional extra withdrawal to equal one semester of scholarship).

2. No taxable scholarship income.

3.The program is confusing when you have 2 dependents so I saw that it originally tried to take just under 2k from my D1 for LLC (instead of the 2k i wanted it to take), and then a small amount for D2. So I was able to 'fix' it to just use the full 2k from D1. Result is the same as far as LLC credit of 2k, but doing it this way reduces the reportable income of D2 to the $3341 I originally posted. 

4. So D2's $3341 is unearned income, thank you.

5. I did misunderstand what form 8615 was asking on D2s taxes, so I've filled that in and now the tax went up for $298 to $379, presumably due to kiddie tax? However I thought the kiddie tax calculation was more complicated, but TT didn't ask for any other information. For example, if some of the info from line 15 1040 is from dividends/interest, does it change the calculation? 

Thanks again!