I have submitted a 1099-Q (529 dist) for my son's tuition, but the earnings are being counted as income for both federal and state returns. How can I fix this?

[rsmohammed]

I have included all information accurately on the form, and the distribution was used only for college fees (tuition, room and board). But I still see the earnings in Box 2 show as taxable income in both returns.

[SharonD007]

Form 1099-Q only needs to be reported on the tax return of the person whose SSN is on the form if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. If the withdrawal is more, the earnings on the excess distribution would be taxable income.

Based on your question, you don't have to report the 1099-Q on your return since the withdrawal exceeds the education expenses, so you can delete it.

To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement. Please review the TurboTax articles Guide to IRS Form 1099-Q: Payments from Qualified Education Programs and What is IRS Form 1099-Q? for further details.

[Hal_Al · Accepted solution]

The TurboTax interview is complicated. You enter the 1099-Q in one place and the educational expenses in a 2nd place and hope will match them up. It's best to leave off the 1099-Q is you know none of it is taxable. 

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 would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

References:

1. 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." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
3. ("IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form."