I withdrew $70,342 from my 529 Plan for my daughter's qualified educational expenses of the same amount (tuition, books and room and board). Turbotax is reducing my qualified education expenses by $10,000, calling it an adjustment "used for credit or deduction" resulting in a tax liability. Not sure what this deduction is, as I have never deducted 529 contributions from my Federal return. Last year this was not an issue. I read through the IRS documentation and do not see any reference to this $10,000 adjustment. The only credit I am eligible for is the "qualified higher education expense for 529 plan". I believe there is an error in the Turbotax software. Please help!
Ok ... the program is trying to help you out ... you can use up to $10K to "pay" qualifying expenses to get the AOC of $2500 ... to do this $10k of the 529 plan distributions will need to be entered as income on your child's tax return and since the standard deduction for a Single dependent is $12K they will not owe taxes on that amount so it is a win win situation. Of course if the child has other income to report they may owe a couple of dollars but you still get the AOC.
Yep, still not fixed in 2019. How annoying. Cost me a lot of time last year, and took a while this year before dejavu set in and I started to remember 2018's struggles. Here's a forum thread from last year:
If you are using the desktop version, go to Forms -> Student Info Wk -> Part VI Education Expense and change the $10,000 in line 17 to $0.
This really should be handled through an interview question.
Note that if you qualify for one of the education credits (American Opportunity or Lifetime Learning) it is almost always better to use education expenses for those credits first, even if part of your 529 plan distribution (the earnings) becomes taxable.
So, when you go to that line 17 on the Student Info Wk, you may want to use $4,000 instead of zero. That may give you the lowest tax, even if part of your 529 plan distribution is taxed. One of the exceptions to the 529 plan 10% additional tax is using expenses for an eligible credit.
And yes, the screen for that in TurboTax for that is harder to find than it should be.