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Level 3

# Is my logic correct......kid in college, 529 plan scholarship withdrawals

TurboTax brain trust:

My dependent Kid is in college

Kid has \$6194 of 1040 line 11 income on his tax return

Parents don't qualify for any Tax credits/deductions for college tuition due to income

1098-T box 1 shows \$54671

\$22,000 in scholarship money from college

total of parental 529 withdrawals = 53054 (\$22,000 of which is scholarship withdrawal)

22,000 scholarship withdrawal has \$13428 basis

QFE= 54671 from 1098-T

Qualified Educational Expenses (QEE) = 54671-22000 = 32671

QEE shortfall = 53054 total 529 withdrawals -32671 = 20383

Kid has 7256 of room left in his 1040 that I could add to his income and have it not be taxed

(13850 std ded -6194 line 11 -400 = 7256)

So of the \$22,000 in scholarship income, I should assign to him \$7256, leaving \$14744 to assign to my tax return?

Also I'm confused should I be assigning gross scholarship 529 withdrawal or the taxable earnings portion?  The entire \$22,000 amount won't be taxable because it has \$13428 of basis.

Thanks!

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Level 15

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

Here’s the short cut entry method in TurboTax:

Enter his 1098-T with \$0 in box 1 and \$7256 in box 5. Do not enter any other amounts. That will put \$7256 of taxable income on line 8r of his schedule 1.

Because we are going to make a designated amount of the student-recipient’s 1099-Q taxable, it’s best to use a workaround, rather than counting on TT to come up with the right answer.

Enter his 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Enter the amount of tuition as \$23,827. Enter \$3205 as the amount of tax-free assistance*. The last entry makes \$3205 of the distribution unqualified but also applies the scholarship exception to the penalty.

On your return: Add the 1099-Q numbers together and make one 1099-Q entry (beware of rounding; box 2 + box 3 must equal box 1).  When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses (don't enter anything  in the education expenses section). Press Done at the 1099-Q summary screen, to get there.

For tuition enter \$30844 (54671-23827). R&B \$5850. Books \$198. For tax free assistance, enter \$11,539 (22,000-3205-7256= 11539)

* We want him to have \$1250 of taxable income. The first \$1250 of unearned income is taxed at the student’s marginal rate (10%). The earnings portion of the 1099-Q is 39% of the distribution (9271/23827=0.39). 39% of X = 1250. X=1250 / 0.39. X = 3205 (we are making \$3205 of the distribution unqualified).

18 Replies
Level 15

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

Books and a computer are also  QEE.

Room and board are also QEE, but only for the 529 distribution.

Q. So of the \$22,000 in scholarship income, I should assign to him \$7256, leaving \$14744 to assign to my tax return?

A. Yes, your math and logic are right.

It can get a little tricky in entering in TurboTax (TT). Reply back for workarounds if you don't get the anticipated results.  But, first dig up your R&B, books and computer expenses.

If he lives off campus, R&B are limited to the lesser of your actual cost or  the schools allowance for attendance (usually the school's R&B on campus charge). If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents

Q. Also I'm confused should I be assigning gross scholarship 529 withdrawal or the taxable earnings portion?  The entire \$22,000 amount won't be taxable because it has \$13428 of basis.

A. Basically, "it doesn't work like that".  In your TT interview you will enter \$14744 as the amount of (tax free) scholarship the student received.  See sample calculation below (in red).

____________________________________________________________________________________________

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 regardless of whose money was used to pay 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 which is only qualified for the 1099-Q)

-\$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. A student, with no other income, can have up to \$13,850 of taxable scholarship (in 2023) and still pay no income tax.

Level 3

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

First off, thanks for your time.

Ok looks like I got the first few steps right.  The example you gave me I found a bit confusing only because the ability to get any sort of credit doesn't apply to our family, but I tried the logic below. I hope you can continue to help me.

I'll leave the QFE the same although I understand what you are saying that I can add some more expenses.  But I'll keep the QFE the same to keep the numbers the same as I am more concerned about HOW to do the math and TurboTax entries than the actual numbers as I can change the numbers later.

So to expand on my 1099-Qs.....I have 3 (total \$53,054.98)

#1 for \$11,000 in my name (one \$11K scholarship withdrawal).

#2  for \$18,228.33 in my name which was the other \$11K scholarship withdrawal and the rest were qualified educational expenses (rent, food, etc)

#3  for \$23,826.65 which is in my kid's name that went directly to his college account to pay \$23,826.65 tuition and books and fees directly billed to me by the college.

You said my math is OK in first post and I did a little more reading in the TurboTax forums, so far so here's where I am at:

QFE= 54671 from 1098-T

Qualified Educational Expenses (QEE) = 54671-22000 scholarship = 32671

QEE shortfall = 53054 total 529 withdrawals -32671 QEE = 20383

Kid has 7256 of room left in his 1040 that I could add to his income and have it not be taxed

(13850 std ded -6194 line 11 kid FED1040 -400 = 7256)

20383 QEE shortfall - 7256 room left under kid's std ded = \$13,127 assigned to parent

So of the \$22,000 in scholarship income, I should assign kid \$7256, leaving \$14744 to assign to my tax return....next...

#3 1099-Q \$23,826.64  is fully covered by qualified expenses as it went directly to the college so I'll leave that one alone right?

13,127 QEE shortfall assigned to parent / -Q#2 = .7202 x 7244.42 box 2 = 5217.27

13,127 QEE shortfall assigned to parent / -Q#1= 1.193 x 4201.01 box 3 = 5011.80

5011.80 is smaller than 5217.27 so I'm going to enter the associated \$11,000 in TurboTax(?) and then this is where my vision gets dark and fuzzy..... help needed : (

And if you could tell me the specific steps to enter the numbers into TurboTax for both me and my kid, that would be extremely helpful and correct me if I'm wrong above?  I'm not understanding the TurboTax program logic.  I have a good idea what I WANT it to do, but HOW to get it to do it is confusing : (

Thanks so much for your time!!

Level 3

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

I replied to your post with some follow up information and my post keeps getting deleted?  Do you know why?

Level 15

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

Don't put any personal info in the post. No SS#, names , phone #, email etc.

Th moderators will usually only edit it out, but if you posted screen shots, etc, they may have deleted it.

Level 3

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

OK, I didn't put any of that.  When I hit the "post" button it says it is being reviewed so hopefully they will put it up as I'm kind of stuck!  Thanks!

Level 15

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

Your follow up post was there, momentarily, but now it isn't.  I don't know what's going on with that. It's a first for me.

What does QFE stand for?

Level 3

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

I thought QFE was the total college expenses.  Box 1 of 1098-T plus any other qualified educational expenses?

When I tried to put my post up the first time it said it was "under review by moderators" or similar.  I saved my response so if it isn't up by tomorrow I'll start another post : (  I've tried to put it up three times now and it disappears within a minute or two.

Level 15

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

As I recall from the brief look I got at your post, the only change from the above information was that you took three 529 distributions, two to you and one with the student as recipient.  I think you also identified that some R&B was covered by one of the distributions.

But, basically, there's too much unnecessary detail. You're looking for  generic "how to" answer, for a complex situation. Although TT can theoretically handle all that, it's best to use a work around based on your actual numbers.

Provide the following info for more specific help (I know you provided it already, but I need it in one place):

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the student's1099-Q
• Box 2 of the student's 1099-Q
• Box 1 totals of your two1099-Qs
• Box 2 totals of your two1099-Qs
• Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• 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
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student a degree candidate attending school half time or more?
Level 3

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

Thanks so much for sticking with me.  If you scroll up a few posts, the moderators put my once deleted post up, which have all my numbers in one place.  It's the post right below yours with the red highlights that you posted.

To answer your questions from the above post that aren't answered on the above (previously deleted) post....

I'm the parent.  The student is the dependent.

Parents not eligible for any FED education credits or deductions due to income

Box 1 of 1098-T in above post, Box 5 is \$22,000 scholarship (unrestricted)

Box 1 1099Q totals for parent = \$18228.33+11000= 29228.33

Box 2 1099Q totals for parent = 7244.42+4201.01= 11445.43

Box 1 1099Q total for student = \$23826.55

Box 2 1099Q total for student = 9270.93

room and Board paid = \$2250 to school + \$3600 rent (he moved out of dorms) = \$5850

books and computers not in 1098-T = 198.00

And my reference to QFE in the post above, I thought meant all expenses, including box 1 in the 1098-T.  So if you see QFE, that's what I was talking about and I'll stop using it : )

Level 15

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

Will the student actually be filing a tax return? Or is you intent to get his income to exactly \$13,850 to avoid filing a return.

It may make a little difference if we make more of his scholarship (or some of his 529 distribution) taxable to take advantage of his lower tax rate.

The "kiddie tax" kicks in at \$1250.

Level 3

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

Yes, he will file a return because he has to pay self employment tax as he is a 1099 delivery driver. Thanks!

Level 15

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

On 2nd thought, making a little more of his scholarship taxable doesn't work. Putting some of  the taxable 529 portion, on his return, rather than yours, does work, but the entry technique is more difficult.  But, it is worth about \$150 to the family.

Let me know if that's how you want to proceed before I work on the details of how to enter.

Level 3

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

I would like the extra \$150 to the family and I don't mind it being a little more difficult if you don't mind guiding me along the way.

Level 15

## Is my logic correct......kid in college, 529 plan scholarship withdrawals

Here’s the short cut entry method in TurboTax:

Enter his 1098-T with \$0 in box 1 and \$7256 in box 5. Do not enter any other amounts. That will put \$7256 of taxable income on line 8r of his schedule 1.

Because we are going to make a designated amount of the student-recipient’s 1099-Q taxable, it’s best to use a workaround, rather than counting on TT to come up with the right answer.

Enter his 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Enter the amount of tuition as \$23,827. Enter \$3205 as the amount of tax-free assistance*. The last entry makes \$3205 of the distribution unqualified but also applies the scholarship exception to the penalty.

On your return: Add the 1099-Q numbers together and make one 1099-Q entry (beware of rounding; box 2 + box 3 must equal box 1).  When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses (don't enter anything  in the education expenses section). Press Done at the 1099-Q summary screen, to get there.

For tuition enter \$30844 (54671-23827). R&B \$5850. Books \$198. For tax free assistance, enter \$11,539 (22,000-3205-7256= 11539)

* We want him to have \$1250 of taxable income. The first \$1250 of unearned income is taxed at the student’s marginal rate (10%). The earnings portion of the 1099-Q is 39% of the distribution (9271/23827=0.39). 39% of X = 1250. X=1250 / 0.39. X = 3205 (we are making \$3205 of the distribution unqualified).