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Tccnjaguar
New Member

Independent Student using 529 for college who files with the 1098-T

Our 21yr old college student, son is filing as a Single, Independent filer since he pays for over half of his expenses.  He had an internship for 6.5 months in 2020 and used 529 funds for qualifying expenses for Spring 2020 tuition.  Who puts the 1098T on their tax return - the person who put money into the 529 account or student filing as a dependent?

8 Replies
WendyN2
Level 7

Independent Student using 529 for college who files with the 1098-T

Whomever is claiming the dependent that the 529 funds are being used for would take the 1098-T information. The IRS does not take into account who paid in, just who the individual "belongs" to. Therefore, since he is claiming himself and you are not taking him as a dependent, he would take the 529 distribution income on his return and report accordingly that the funds were used for qualified educational expenses.

Hal_Al
Level 15

Independent Student using 529 for college who files with the 1098-T

Q.  Who puts the 1098T on their tax return - the person who put money into the 529 account or student filing as a dependent?

A.  It depends. But, it's not determined by  who put money IN  the 529 account.  

 

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or deduction or possibly your student has taxable scholarship income.  Claiming those items, or calculating the taxable portion of a 529 distribution goes easier, in TurboTax, using the 1098-T.

 

The person(s) who uses the 1098-T are either or all of the following:

1. The person claiming a tuition credit or deduction

2. The person reporting taxable scholarship

3. The person reporting taxable 529 plan distribution

 

1. Since you son is filing independent, only he can claim the tuition credit or deduction (there are harsh restrictions on students under 24 claiming much of a credit)

2. Only the student claims scholarship income, regardless of dependency

3.  The "recipient" of the distribution and 1099-Q reports any taxable 529 plan money

 

"Our 21yr old college student, son is filing as a Single, Independent filer since he pays for over half of his expenses."  For purposes of the support test, 529 money is considered as coming from the plan owner (usually the parent) and not the plan beneficiary (the student). This is true, even if the distribution was sent to the student-beneficiary or the school, rather than to the parent.

_______________________________________________________________________________________

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 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 (usually on the student’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 600= $240

You have $240 of taxable income  

 

**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. 

feiwenw66563
Returning Member

Independent Student using 529 for college who files with the 1098-T

It is still unclear who should claim 1098-T or 1099-Q. I have the same case, my son will file independently. Can he claim 1098-T and I (parent) claim 1099-Q because I am listed as a recipient. Thanks for your help.  

Hal_Al
Level 15

Independent Student using 529 for college who files with the 1098-T

Q. My son will file independently. Can he claim 1098-T and I (parent) claim 1099-Q because I am listed as a recipient. 

A. Yes.

What you cannot do is use the same expenses to claim your respective tax breaks.  What ever expenses he uses to claim the tuition credit and  keep his scholarships tax free, cannot be used by you to claim an earnings exclusion on the 529 distribution. No double dipping!

 

Provide the following info for more specific help:

  • Box 1 of the 1098-T
  • box 5 of the 1098-T
  • Any other scholarships not shown in box 5
  • Does box 5 include any of the 529/ESA plan payments (it should not)
  • Is any of the Scholarship restricted; i.e. it must be used for tuition
  • Box 1 of the 1099-Q
  • Box 2 of the 1098-Q
  • Room & board paid. If student lives off campus, what is school's R&B charge. If the student lives at home, only the school's board charge for on campus students. 
  • Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
  • How much taxable income does the student have, from what sources
  • Is he trying to claim the tuition credit (is he eligible)?
  • Is the student an undergrad or grad student?
  • How old is the student
  • Is he a full time student
  • How does he qualify to file independent

 

 

feiwenw66563
Returning Member

Independent Student using 529 for college who files with the 1098-T

@Hal_Al Much appreciated your help with quick response. 

 

Q&A with some number as an example:

  • Box 1 of the 1098-T : $40k
  • box 5 of the 1098-T : zero
  • Any other scholarships not shown in box 5: None
  • Does box 5 include any of the 529/ESA plan payments (it should not): No
  • Is any of the Scholarship restricted; i.e. it must be used for tuition: No scholarship
  • Box 1 of the 1099-Q: $20k
  • Box 2 of the 1098-Q: $600
  • Room & board paid. If student lives off campus, what is school's R&B charge. If the student lives at home, only the school's board charge for on campus students. A: around $12k
  • Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers: $500
  • How much taxable income does the student have, from what sources: income $30k earned from his summer job
  • Is he trying to claim the tuition credit (is he eligible)? Q: probably yes and what is the eligible requirement? 
  • Is the student an undergrad or grad student? A: undergrad
  • How old is the student: A: under 24
  • Is he a full time student: A: yes
  • How does he qualify to file independent: He pays over 50% of his expenses
Hal_Al
Level 15

Independent Student using 529 for college who files with the 1098-T

@feiwenw66563 OK.  This is real easy.

Do not enter the 1099-Q, at all.  You just risk making errors and it coming out wrong. You only had a $20K distribution and the $40K in box 1 of the 1098-T is the only documentation you need in case of an (unlikely) IRS inquiry.  

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board 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. 

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." 

 

Your son enters the 1098-T on his return.  He doesn't need to bother entering any other numbers (or adjust the 1098-T), as TurboTax(TT) will only use $4000 of expenses to claim the maximum credit.  If it makes you feel better, you can change the box 1 amount to 20,000 (the original 40K less the 20K allotted to the 1099-Q).  In the personal info section of TT, be sure he answers yes to the question about more than half his support coming from earned income.  That is needed to get the refundable portion of the American Opportunity Credit.

 

PS. Only the $600 in box 2 of the 1099-Q was ever at risk of being taxed, if there hadn't been  sufficient education expenses 

feiwenw66563
Returning Member

Independent Student using 529 for college who files with the 1098-T

Thanks for the explanation. It's clear for federal return. However for 529 NY State contribution, it provides some credits to the max of 10,000 contribution each calendar year. In order to do that, do I need to enter 1099-Q on my claim, and my son claim 1098-T on his return? Thanks again for your help

AmyC
Expert Alumni

Independent Student using 529 for college who files with the 1098-T

@feiwenw66563 The contribution to the 529 is not related to the distribution. You do not need the 1099-Q. Your son will claim the 1098-T.

 

NY taxes 529 distributions not used for education. 

The  NY 529 contribution must be reduced by the amount of 529 distribution included in income. You have none included in income, so there is no reduction for you.

 

Tax Benefits of New York 529 Plans - Saving for College states:

Contributions to the New York 529 plans are deductible on state income tax returns. Contributions of up to $5,000 for single filers and $10,000 for joint filers may be deducted on New York state income tax returns.

 

@Hal_Al answer is perfect.

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