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Q. I have paid partial tuition fee from College Choice 529 plan, and I am able to enter that info from 1099-Q. How do I enter remaining partial tuition paid from my account?
A. You can't enter just remaining partial tuition paid out-of-pocket. You enter all the information and let TurboTax (TT) sort it out. At least theoretically that's how it works. But, more often, than not, TT gets it wrong. It's important to enter the 1099-Q, before you enter the 1098-T.
If the entire 529 distribution was used for qualified educational expenses (QEE), you can just not enter the 1099-Q. Then you can enter the adjusted the expenses and claim the tuition credit. It's best if you have some idea of the expected output. Room and board are QEE for the 529 distribution, but not for the tuition credit.
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Qualified Tuition Plans (QTP 529 Plans) Distributions
General Discussion
It’s complicated.
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 American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). 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.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship***
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q (on the recipient’s return)
Box 1 of the 1099-Q is $5000
Box 2 is $2800
3000/5000=60% of the earnings are tax free; 40% are taxable
40% x 2800= $1120
There is $1120 of taxable income (on the recipient’s return)
**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.
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."
***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. Most people come out better having the scholarship taxable before the 529 earnings.
Provide the following info for more specific help:
Please find my answers below
Please advise if you have any additional questions.
Thanks
Thank you for the answers. The 1099-Q does not need to be entered since all of it was used on qualified expenses. It can be tucked into your tax folder.
You have tuition of $27,955 - $200 scholarship - $13947.50 from Q = $13,807.50 left out of pocket. You can claim the $10,000 needed for Lifetime Learning Credit.
To claim the credit, enter the 1098-T. Because you qualify for the entire amount of the credit, you don't need to worry about manipulating numbers.
If your $13,807.50 had been less than $10,000 we would have needed to use part of the 1099-Q on room and board. You did not answer that question above other than to say the student lived at home. The college should have a guide for those living off campus. The student still has some meal expenses -even when living at home. The student may be required to have internet for some classes, along with other living expenses.
Reference:
You have more than enough expenses for the 529 distribution to be tax free and you claim the maximum tuition credit.
Don't enter the 1099-Q, in TurboTax (on either your tax return or your daughter's). The 1099-Q is just an informational document. The numbers are not required to be reported on your tax return. 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.
When you enter the 1098-T, in TurboTax, enter $16,451* in box 1. Do not enter any other amounts.
*$27,955 + 2644 = $30,599 Total qualified expenses. $30,599 -13,948 (paid by 529 distribution) - $200 (scholarship) = $16,451. $16,451 is your Adjusted qualified educational expenses.
Grad students are not eligible for the more generous American Opportunity Credit. You are eligible for the Lifetime learning Credit (LLC). The LLC is 20% of tuition paid, up to $10,000. The LLC is non-refundable. It can only reduce your tax liability.
The 1098-T is also only an informational document. The numbers on it are not required to be entered onto your tax return. If you claim the tuition credit, you do need to report that you got one. TT will handle that.
You claim the tuition credit, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid.
Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.
Note books and computers are not qualified expenses for the LLC (they are for the AOC). But they are qualified expenses for the 529 distribution.
If you want to withdraw more from your 529 plan next year, find out the school's room and board "allowance for attendance" for students living at home. You can withdraw that much from your 529 plan to cover her food costs.
Thanks for the information.
Thanks for the information.
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