Since the expenses occurred in 2017 they must be accounted for next year when preparing the return for Tax Year 2017. Additionally the University or College will not provide form 1098-T until next year as well. This form is necessary to substantiate the bulk of college expenses, especially if they were paid with and ESA or 529 distribution.
The IRS does not obligate the taxpayer to enter the information from form 1099-Q unless a distribution becomes taxable. A distribution is taxable when any portion of it is not used for Qualified Education Expenses. The portion of the distribution that becomes taxable will come from the earnings reflected in 1099-Q. In addition to being considered as Other Income a 10% additional tax can be applied under certain circumstances.
At the moment the best plan of action for next year is to keep good records of the Qualified Education Expenses for next year's Taxes. Since your granddaughter is in her first year of College she qualifies for the American Opportunity Credit. She will be allowed to specify what amount of her Education Expenses she (or her parents) would like to attribute to this Credit. This is why keeping good records of these expenses is important. If her expenses exceed the Distribution she can use the excess without tapping into the distribution and creating taxable income.
For Coverdell ESA and 529 Plan purposes Qualified Education Expenses are:
- Tuition and fees;
- Books, supplies and equipment;
- Room and board expenses for students enrolled at least half-time only to the extent they are not more than the greater of
- The allowance for room and board included in the cost of attendance for federal financial aid purposes, or
- The actual amount charged if the student resides in housing owned or operated by the eligible education institution; and
- Expenses for special needs services required by a special needs beneficiary and incurred in connection with enrollment or attendance.
