I'm getting the message "you can't claim tuition and other fees because your income is too high" and getting taxed on funds withdrawn from 529 to pay for tuition. Why?

[megoodin]

The message also says that my adjusted gross income exceeds maximum limit of $180k.  However, I thought 529 withdrawals that were less than tuition expenses would be not taxable.  Thanks for your help!

[Hal_Al · Accepted solution]

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.

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." 

One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. That reduces the amount that can be used to claim the  529 earnings, shown on the 1099-Q, as being totally tax free. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it (to 0, in your case).  You may reach that screen sooner.

[megoodin]

Hi Hal_Al,

Thank you very much for your answer to my question.  That makes a lot of sense and is very helpful.

I went through the 1099-Q and 1098-T numerous times and it still included a taxable portion of my 529 withdrawal.  The odd thing was that it never asked me if my child was convicted for a felony.  That question appeared when I did the Federal tax check.  I answered "no" and didn't think much of it.

Just now I removed the 1099-Q information and re-entered that information and the 1098-T information. For some reason this time it asked me the felony question.  I again answered that question as "no".  However, now after completing the educational expenses section it didn't tax me for the 529 withdrawal to offset tuition expenses!   Yeah, thank goodness.  Not sure what happened previously, just thankful it worked out.

Again, thanks for taking the time to address my question.  Hopefully this exchange will be helpful to others.