I am concerned because for 2019, IRS audited us over 1099 Q and demanded taxes on earnings. Then they corrected, but still asked for the penalty that we paid although we didn't think we owed it.
Q. I was told we don't qualify for education credits due to high income. Is 1099Q taxable?
A. No. Although there is an income limit for claiming a tuition credit, there is no income limit for a 1099-Q (529 plan distribution) to be tax free.
So, not being able to claim a tuition credit just frees up more education expenses to be applied to the 1099-Q.
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. 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. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
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."
Thanks. That's a relief. But can I force Turbo Tax report the 1099 Q to IRS when I efile? Because, as I mentioned, in 2019, IRS said we didn't report the income. When we sent copies of 1099 Q, they still charged a penalty although the form clearly said no penalty. It took months, and certified letters to get this resolved. I was wondering if simply by sending 1099 Q proactively (as you would with a paper filing), we could avoid that hassle?
Q. But can I force Turbo Tax report the 1099 Q to IRS when I efile?
A. No. I had the same concern a few years back and used a work around to force TT to report it. It didn't help. I still got an IRS CP2000. But it was quickly handled by providing copies of the school invoices.
Q. I was wondering if simply by sending 1099 Q proactively (as you would with a paper filing), we could avoid that hassle?
A. No, sending the 1099-Q can't be done.
You could file on paper and attach a copy of the TT 1099-Q worksheet. But I wouldn't. Attachments are typically ignored by the IRS