This is the first time I'm doing taxes with educational expenses for my daughter, and I'm a bit confused. We have a 529 plan where tuition and room and board were paid directly to the school, so I'm pretty sure I don't even report that. But, we took some 529 money directly paid to us to cover the deposit (part of tuition) and books. We paid for a computer, but not out of the 529. In TurboTax, the 1099-Q form information is requested both under "personal income - misc income - 1099-Q" and under "Deductions & Credits - Education - 1099-Q". I think that I shouldn't be putting the information in the personal income section, but I'm confused.
Do not enter the 1099-Q at "personal income - misc income - 1099-Q". Enter it only at "Deductions & Credits - Education - 1099-Q". The 2nd 1099-Q, in your name (we took some 529 money directly paid to us) does not go on your daughter's return. It goes on yours.
Or better yet, don't enter it at all since it was totally used for qualified expenses (Tuition and books). You may also count the computer toward the 1099-Q, even though the 529 money was not used directly to pay for it.
You are correct, the 1099-Q in your daughter's name ( tuition and room and board were paid directly to the school) does not have to be reported. But you may be missing out on a tuition credit. Read on for more detail.
Qualified Tuition Plans (QTP 529 Plans)
For 529 plans, there is an “owner” (usually the parent), 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 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.
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship***
-$4000 used to claim the American Opportunity credit (on your return)
=$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
You have $240 of taxable income (600-360)
**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.
***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.
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."
Thank-you so much for your response! I have deleted the 1099-Q information from the personal income section. However, after reading the full information of your response, I am now confused in other ways.
The 1099-Q form is in our name - this is money we used to pay for the books and the initial deposti. There is a 1098-T in my daughter's name. This is the one that has the full payment to the college (over $15,000) plus a scholarship ($4000). That was all paid with 529 money. My daughter did not work & doesn't have a W2, so I wasn't planning for her to submit taxes.
Are you saying that I should put in the 1098-T information in our taxes, even though it is in her name and even though it was paid with 529 money? This is what I am gathering from your more detailed information. And, that I should not bother with the deduction for the computer because the 1098-T would be a better deduction.
Did I get it right? I'm not sure because it makes no sense that I should get a deduction with expenses that I paid with tax-free money. I don't want to lose the tax free benefit from the 529.
I also understand that taxes and government regulations often make no sense.
Thanks in advance!!
You got a 1099-Q form in your name for the money you used to pay for the books and the deposit. Your daughter should have gotten a 2nd 1099-Q, in her name, for the money that went directly to the school. This is in addition to the 1098-T. The 1098-T comes from the school and does not replace or substitute for a 1099-Q from the 529 plan. They are two separate documents
Q. Are you saying that I should put in the 1098-T information in our taxes, even though it is in her name and even though it was paid with 529 money?
A. Yes. You should use $4000 of the tuition to claim the American Opportunity Credit (AOC). It is worth $2500 to you, unless your income is too high or too low.
Q. I should not bother with the deduction for the computer because the 1098-T would be a better deduction.
A. Yes, but not exactly. You get to count $4000 of the tuition toward the AOC But you get to count the computer cost for the 1099-Q (and room & board), even though you didn't directly pay for it with 529 money. It's not a "deduction", per se. It's a qualified expense for calculating the excludability of the 529 plan earnings.
Provide the following info for more specific help. I'll tell you how to enter everything. I suspect your daughter will still not have to file a tax return.
- Box 1 of the 1098-T
- box 5 of the 1098-T
- Does box 5 include any of the 529 plan payments (it should not)?
- Box 1 of each 1099-Q
- Box 2 of each 1098-Q
- Room & board paid. If she lives off campus (even at home), what is the school's R&B charge for on campus students
- Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers, tuition deposit (the deposit may already be included in box 1).
Wow, this is great. Thank-you so much for the help!!
1098-T box 1: $15,090.83
1098-T box 5: $4000
Box 5 is the grant she received from the school only.
One curious thing, box 7 is checked, which indicates amount was for period Jan - Mar 2020. I think it is for both 2019 and 2020 (although we had money returned from 2020 due to COVID-19, which I've sent back to the 529).
My daughter's 1099-Q:
Box 1: $18,761.56
Box 2: $9,127.88
Box 1: $904.87
Box 2: $442.02
I don't know if all these numbers are supposed to match, but I do remember that she got some money (maybe $1500?) for having invested in our state's sponsored 529 for so long.
Room & board information from the school bills:
Fall housing: $4575.87
Fall meal plan: $2736.21
Spring housing: $4575.87
Spring meal plan: $1889.75
The deposit was $600. Books came to $304.87. The addition of these two costs is what is included in our 1099-Q. The computer came to $1082.17.
Wow, lots of information that I had to find. Thanks for getting me over the brain freeze with my taxes. I would have had them completed before April 15, but I haven't been able to figure out what goes where. The extension of the due date hasn't helped 🙂
You have $30,856 in qualified expenses. Less $4000 paid by scholarship and $4000 you will use to claim an education credit = $22,856. Since that is more than the $19,667 ( 18262 + 905) you withdrew from the 529 plan; neither of the 1099-Q's need to be reported. Do not enter them in TurboTax, at all.
Your daughter does not need to file a tax return.
To claim the tuition credit, enter the 1098-T on your return. To simplify the process enter $11,189* in box 1 and $4000 in box 5. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. When asked, do not enter book and computer expenses, since they're already accounted for.
Ignore the refunded money from the school, since you put it back in the 529 plan (as you should have). It is common for 2019 payments to include the 1st 2020 term. Tax rules go by when the money was paid; so you are OK on that point. Ignore the $1500 sign up bonus. It's included in the earnings (box 2 of the 1099-Q).
*$30,856 total expenses less $19,667 used for the 1099-Q's = $11,189.
Keep your calculations, with your tax records, since they won't show on the TurboTax worksheets.
I used 529 money to pay for both tuition and room & board. Did you come to $30,856 by adding in room & board? I'm pretty sure that the only expense not covered by the 529 was the computer.
Last year, I was not working (my job moved several years ago to CO, but we did not), so we needed to pay for expenses only through money already saved. I am working now (although part time), so, for this year, we can reconsider a better tax strategy by using some of our money to pay expenses directly.
Q. Did you come to $30,856 by adding in room & board?
A. Yes. And also the books and computer.
Q. I'm pretty sure that the only expense not covered by the 529 was the computer?
A. No. The computer does count for the 529, even though you did not literally pay for it with 529 money. The fact that the computer was bought in the same year as the 529 distribution, and was needed for school, qualifies it.
Hum, what I am saying is that the amount on the my daughter's 1099-Q, $18,761.56, includes both tuition and room & board. When you added room & board on, it is now double-booked.
"what I am saying is that the amount on the my daughter's 1099-Q, $18,761.56, includes both tuition and room & board"
The 1099-Q does not "include " any expenses, at all. It simply documents a distribution (withdrawal) of money from the plan. It is then, up to you, to determine if you had enough qualified expenses to treat the distribution as tax free (or determine the taxable portion). You do have enough expenses.
Your expenses are:
Tuition and Fees: $ 15,090.83
Fall housing: $4575.87
Fall meal plan: $2736.21
Spring housing: $4575.87
Spring meal plan: $1889.75
The deposit: $600.
The computer: $1082.17
Total Expenses $30,856
Paid by Scholarship -$4,000
Net paid $26,856 That can be use to claim tax benefits. You can allocate the net paid to either the 1099-Q(s) and the Tuition Credit.
You allocate $19,667 to the 1099-Q's and $7189 to the tuition credit. It only takes $4000 of expenses to get the maximum American Opportunity credit .
You should have withdrawn $3189 (7189-4000) less from your 529 plan, this year; saving it for next year and beyond.