Is this TurboTax bug when it figures out "adjusted qualified expenses" for you to coodinate education benefit credits?

[CL4504]

Is this a bug in TurboTax when it is figuring out "adjusted qualified education expenses" for 529? My son is a full-time college student. He has the following expenses for 2019: (1) tuition $19,560, (2) books and supplies $1,001, (3) room and board $9,504, and (4) computer/software $2,397. We have a distribution of $24,493 from 529 Plan. The TurboTax made a "Student Information Worksheet" when it tried to figure out all eligible education benefits. Part IV of the Worksheet is Education Expenses. For American Opportunity Credit, Lifetime Learning Credit, Tuition and Fees Deductions, it only considered the first two items in the above expense list, and the total is $20,561. Then it subtracted $10,561 and left only $10,000 as the "adjusted qualified expenses" for considering each of the three benefits. And when TurboTax calculated "adjusted qualified expenses" for 529 Plan, it considered all the four items in the above expense list, including room/board and computer/software, total $32,462, which is right. However, it subtracted $10,000 before getting to the  "adjusted qualified expenses" for 529. In our case, the  "adjusted qualified expenses" for 529 Plan is $22,462 ($32,462 - $10,000), less than our 529 distribution. So TurboTax says we are entitled to the American Opportunity Credit, but we need to pay tax for the earning part of the excess withdrawal from 529. However, from my understanding of Pub 970, American Opportunity Credit can only consider maximum $4,000 (TurboTax actually used $4,000 in preparing Form 8836). If subtracting $4,000 from our total 529 qualified expense, the adjusted qualified expense will be $28,462 ($32,462 - $4,000), which is greater than our 529 withdrawal and we have no taxable distribution. TurboTax used this wrong excess when preparing the "Form 1099-Q Summary" and transferred the incorrect tax into Schedule 1 (Form 1040), line 21. Can anyone tell me why TurboTax subtracts $10,000 for getting the 529 "adjusted qualified expenses" regardless what specific education credit to coordinate with 529. My understanding of Pub 970 is when coordinating 529 with Lifetime Learning Credit, we should allocate $10,000 from total expense, but when coordinating 529 with either  American Opportunity Credit or Tuition and Fees Deductions, we should allocate $4,000 from total expense, and leave the remaining to 529 or out-of-pocket.

[NCperson]

does your son have any scholarships? that is netted out of all the math

what is in Box 5 of Form 1098-T? 

[CL4504]

Thank you for the question. My son didn't get any scholarships. The Box 5 in his 1098-T is zero.

[KathrynG3]

No, there is not a glitch. You are correct, however, that the $10,000 would apply to the Lifelong Learning Credit, not American Opportunity Tax Credit maximum of qualified education expenses.

I recommend deleting the 1099-Q and 1098-T. Then, re-add them as described below.

1. To delete your existing education expense details, go to the education area of your return:
   1. From the left menu, select Federal
   2. Deductions & Credits
   3. Scroll down to Education and click Show more
   4. Delete each of the three input areas that you have anything entered: 1099-Q, 1098-T and 1098-E 
2. Verify these areas are deleted:
   1. From the left menu, select Tax Tools
   2. Tools
   3. Delete a Form
   4. Delete education related forms if they are still listed. These could include 1098-T Wks, Form 1099-Q, Form 1098-E, Education Tuition and Fees Summary
3. Return to the Education section of your return and input your details again
   1. From the left menu, select Federal
   2. Deductions & Credits
   3. Scroll down to Education and click Show more
   4. Begin by entering your  ESA and 529 qualified tuition programs (Form 1099-Q) and then enter your Form 1098-T details.

[CL4504]

Hi KathrynG3, thank you for your detailed answer and instruction. I have tried your method three times by wiping out the 1098-T, 1099-Q, and all education expense information and reentering information following your suggested order, but unfortunately the issue reported in my original post persists. Namely, although TurboTax uses only $4,000 from our total "qualified education expenses" $32,462 to get us the American Opportunity credit in Form 8863, it still deducts $10,000 from the total "qualified education expenses" $32,462 to get the "adjusted qualified education expenses", which is below our 529 distribution in 1099-Q. This $6,000 more deduction causes us to pay tax for "taxable 529 withdrawal" while in reality $32,462 - $4,000 is greater than our 529 withdrawal. I do think the use of $10,000 deduction from the total "qualified education expenses" when comparing with the 529 withdrawal is a TurboTax bug.

[NCperson]

I am going to try to distill your posts; there are a lot of words, but it's the numbers that matter.

1) your total expenses are $19560, $1001, $9504 and $2397 totalling $32462

2) $4000 of that is subtracted to get the AOTC credit, leaving $28,462

3) your 1099Q Box 1 distribution is $24,493 

Since the expenses in 2) exceed 3), nothing on the 1099Q is taxable.  There is no need to input the 1099Q into TT; it is not an IRS  requirement.  The 1099Q instructions (google it!) simply states you must determine the taxability of any distribution.  And you have. 

make life easy, just delete the 1099Q and move on.  Save your documentation that your expenses exceed the 1099Q and file it if the IRS ever comes knocking to prove it was not taxable.  

[CL4504]

Hi NCperson, thank you for the suggestion! You are right - in my case that I don't have taxable 529 distribution I can go around the TurboTax problem by simply skipping the 1099-Q information on TurboTax. But I guess for some TurboTax users who do have taxable distributions from 529 and need to figure out their tax cannot avoid this bug. So I hope by making some noise here that TurboTax people can notice and fix this issue. Thanks!

[KathrynG3]

Here is an additional option if you did reconsider including Form 1099-Q, which NCperson accurately identified as optional for your circumstances:

This was posted earlier today that you may find useful: Why are the Adjusted Qualified Higher Education Expenses on my 1099-Q worksheet being reduced by $10...

Thank you for your patience with this entry. 

@CL4504

[Lotick]

I have a similar problem to the original question.

I have 2 kids in college and four 1099-Q's.  The recipient was always my wife for one of the two kids.

I have 3 1098-T's, 2 for my son and 1 for my daughter.

My daughter's 1099-Q's look fine when I go into TurboTax forms and look at her 1099-Q's.

My son's are not right.

For one thing I show up in one of the 2 TurboTax forms as the recipient, but I entered my wife as the recipient and triple checked that and changed it.  I never entered myself as a recipient and it never shows up as my wife as the recipient.  Maybe that doesn't matter for tax purposes, but it makes me wonder if there is something wrong with TurboTax.

The real problem is with  the tax part.  $20,052 were withdrawn from  529 and I entered $21,837 of expenses.

There is $7700 of scholarship and only $6958 of tuition on the 1098-T's (for some reason summer tuition didn't show up) so we may owe some for the scholarship, but that is not the real problem.  If I look at the TurboTax 1099-Q forms on line 2c under the QTP section, there is only $15,625 of "Adjusted Qualified Higher Education Expenses Applied" , or 70% of the expenses entered. Each of the two 1099-Q's had 70% of the withdrawal entered as expenses.

Why is TurboTax only entering 70% of the expenses that were entered?

I repeated going through the whole "Education" section several times.  I looked at the other discussion about $10,000 AOC credit and never found anything that helps. (I never get asked about how much credit to allocation or even find an "Education Summary").  He already used the AOC credit so that should not be a factor.

[maglib]

Note education credits may not be refundable. Which means the amount can't reduce your tax liability below 0.   There are also AGI limitations for the credits.

Did you enter the 1098-T before you input the expenses?  Make sure you have that done first.

I reinput your information into a test case and it worked fine.  

On the Student Info Wksht. Part VII is #1 selected?

Let me know what shows up in Part VI as that is where the best view of what's being calculated is.

[NCperson]

I didn't see any mention of AOTC.   Under the assumption that you are NOT eligible for that tax credit, there really is no reason to input the 1099Qs as all.   You've already proven that none of it is taxable based on the analysis that you'e provided.

Look closely at the instructions on the 1099Q -  you are simply required to determine the distributions are not taxable; it is not reported to the IRS in any event.   Nothing in Box 2 is taxable because your qualified expenses exceed Box 1.  And those can be done in summary as you have multiple 1099Q.  might be an easier approach.

if you are eligible for AOTC, then  up to $4000 of the expenses off the 1098T is consumed to yield the $2500 of tax credit.   That could be why the expenses are being adjusted. 

Can you comment back on whether you are eligible for AOTC and I can take you through the math? 

[Lotick]

Just found the Student Info Worksheet, thanks for that tip.

I deleted all the Education section information and input that through the discussion section as someone had suggested, so the 1098-T information was input before the 1099-Q information.  The results are the same and I'm using those new worksheets to reply to you.

Part VII, Box 1 is checked.

Part V, Line 9 is $0 and line 10 is $7700.  That seems correct to me (I was wondering if the scholarship information was messing something up).

Not sure how to successfully transmit Section VI to you, but here goes.

(Not Qualified for any credits. This is just for 529, so anything else is "Not Applicable")

Line 1: 6958

Line 2 and Line 3, blank

Line 4: 1,763

Line 5: blank

Line 6: 13,415

Line 7, 8, 9, 10, 11,12 all blank

Line 13: 22136, 8721, 6958, 6958, 22136, 22136, 6958

Line 14: Blank

Line 15:  7700, 7700, 6958, 6958, 7700, 7700, 7700

Line 16: Blank

Line 17: 0's

Line 18: 1021, 0, 0

Line 19: 7700, 8721, 6958, 7700, 7700, 7700

Line 20: 14436, 0, 0, 0, 14436, 14436, 0 ,0

So it seems the key is Line 15 and Line 20.  Is the $7700 scholarship money is taken out of the qualified expenses?

I thought I was told previously that qualified 529 expenses were not reduced by scholarships?  Before they were only $200 - $300 so I would not have noticed.  Have I been wrong all these years???? 

Thanks for helping me understand this and especially for pointing me to the student worksheet.

[Lotick]

I'm not eligible for AOTC.

From an earlier response I think the key to my confusion may be the scholarships and looking at the Student Info Worksheet.

Thanks for taking the time to help me out.

[NCperson]

@Lotick - then without the AOTC, really might be better to just remove the 1099Qs from the tax returns....

here is what the isntructions say on the 2nd page of the 1099Q

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.

and you've determined they are non-taxable (because the qualified expenses exceed Box 10.  You can sum all the 1099Q's up - it's not per family member

also  if the scholarship (box 5) exceeds the expenses (Box 1) on the 1098T that difference goes on the student's tax return - not your's.  that does have to be calculated for each family member, 

[Lotick]

Thanks for your reply and helpful information.

I'm wondering about "when the the scholarship (box 5) exceeds the expenses (Box 1) on the 1098T".  If the student can be claimed as a dependent by the parents, does the difference get taxed at the parent's rate and not the student's rate?

Thanks again for the help and education.