Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

[pmeaux123]

At the top of the screen, click on Federal Taxes, Deduction and Credits.  Look for Education Scholarships and Expenses and click Update.  My screen then said "You can't claim tuition and other fees".  Ignore this and hit Continue.  Education Expenses Summary should come up.  Click edit to the right of the student's name.  Edit Education Information.  Click Continue on each screen until you get to "Amount Used to Calculate Education Deduction or Credit".  This is where you would put a zero.  Hope this helps.

[Carl]

One thing that I cannot stress enough for those who have a 1099-Q:
When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

[pmeaux123]

I have another question tied to this line of questions.  My son has a full scholarship.  I'm pretty sure the best scenario is having him report it because the room and board is taxable.  However, I wanted to look at a scenario where I report it.  When I put in the 1098-T information, nothing shows up as taxable.  However, when I dug deep into all the worksheets, it shows where the scholarship in excess of his qualified expenses is taxable.  But it never flowed through.  Why is that?  Is there a requirement in the case of a full scholarship where the student must report the 1098-T?

[Carl]

I'll post the whole she-bang in the answer box below. But basically, when all qualified education expenses are covered by scholarships, grants, 529 funds, there are NO tax benefits to be had by the parents. Additionally, if there is any excess funds not used for qualified expenses, that excess is taxable income "to the student", not the parent. On top of that the student will be taxed on those excess funds at the parent's higher tax rate. So when your student reports all this stuff, you can expect them to be contacting you for information from your tax return. They will need it in order to correctly report the income, as required by law.

[pmeaux123]

So why doesn't TurboTax tell me any of this when I input the 1098-T.  I would have filed, paid the lower tax (because it didn't flow through) and been on my merry way.  I only know what I know because I dug deeper.  Turbo Tax is very frustrating and does not handle the education scenarios well at all!

[clljones]

I agree with the last comment.  I had to create workarounds in the forms view in 2015 and 2016 because following the questionnaire exactly produced incorrect taxable distributions even though every penny of the 1099-Q distributions were applied to qualified education expenses.  An Intuit CPA acknowledged the program problem last year and endorsed my workaround.   Instead of fixing the problem, though, TurboTax  managed to prevent the workaround for 2017 by not allowing me to make the necessary changes on forms.  The company seems to be practically begging long-time users to switch to another software package.

[kenmack830]

I've been frustrated by this issue for weeks only to now find that it has been a known issue with TT.  TT said they won't fix this because of the small number of users it affects.  I will be one less user which it affects next year.

[maglib]

I've been told that TT is working on fixing the education interview for next year.

[flat-tax]

TT did not fix it for 2018.  Thanks to all for the tip to zero out the number.  That worked to make my expenses match my withdrawal.  I stood to lose $800 had I not noticed that my refund dipped when I entered the 529 info, and I knew it should not have affected my taxes.  I spent a couple of hours trying to figure out what was not entered correctly.

[pmeaux123]

Hey Carl. Did you see where they changed the kiddie tax?  For 2018 my son’s scholarship was NOT taxed at my rate. Nice change.

[Carl]

It's my understanding the kiddie tax rate is now tied somehow to the rate paid by estates/trusts or something like that. The kiddie tax did not go away by any means. But the rules have been changed.

[pmeaux123]

Right. Kiddie tax still there but not at parent’s rate. It’s a tiered-type rate, which in my son’s case ended up lower than our rate. I was pleasantly surprised when TurboTax did not ask for my tax info on my son’s return.

[taxdoingmom]

For 2018 In the education summary for each student, the last item "education information" was where I found the item to zero out. It was the "amount used to calculate education deduction or credit" question

[dill4fam]

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[mrosenthal]

Echoing the thanks to others for the point about zeroing out the last item under the "Education Information" series of questions for each student so parents aren't taxed on 529 distributions.  I don't know how TurboTax comes up with the default number, but for people who benefit only from distributions from 529 plans, entering a zero seems to do the trick.