TurboTax uses parts of your dependent's college expenses to claim the Tuition credit. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q, as being totally tax free.
If your income is too high to be eligible for a tuition credit, see the TurboTax FAQ for a work-around. https://ttlc.intuit.com/questions/4451709-why-is-the-529-distribution-from-my-1099-q-showing-up-as-taxable-incomeDEAD LINK
TurboTax uses parts of your dependent's college expenses to claim the Tuition credit. That reduces the amount that can be used to claim the 529 earnings, shown on the 1099-Q, as being totally tax free.
If your income is too high to be eligible for a tuition credit, see the TurboTax FAQ for a work-around. https://ttlc.intuit.com/questions/4451709-why-is-the-529-distribution-from-my-1099-q-showing-up-as-taxable-incomeDEAD LINK
Qualified Tuition Plans (QTP 529 Plans)
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
60%x600= $360
You have $240 of taxable income (600-360)
**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.
***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.
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."
My 529 earnings are being taxed. I'm the recipient and my son is the beneficiary.
That's not possible. On the 1098-Q "recipient" and "beneficiary" are the same. The owner of the SSN in the "recipient's TIN" box is the beneficiary recipient. That is the person that reports the 1099-Q on their tax return.
As explained elsewhere in this thread, I suspect you are the custodian of the account.
@Carl .
"I'm the recipient and my son is the beneficiary'' is possible and frequent.
"On the 1098-Q 'recipient' and 'beneficiary' are the same" UNLESS BOX 6 ON THE 1099-Q IS CHECKED.
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.
I am having the exact same experience. Fully qualified expenses are not offsetting the taxable portion of the 529.
@8194Harlem You say *Fully qualified expenses are not offsetting the taxable portion of the 529*.
Technically, that's not what you are after. You want fully qualified expenses to offset the distribution itself (box 1 of the 1099-Q). What ever part is not offset is then used to calculate the taxable portion of the earnings (box 2).
If you know none of it is taxable, then just don't enter the 1099-Q, in TurboTax. See explanation above.
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.
The total qualified expenses plus 3 1098-T entered equals the total 529 distributions, yet, by entering it as directed, there is a difference of $800 in Federal Tax due. So you are recommending that I answer "no" to the question about whether I have received a 1099-Q, even though I have?
Q. So you are recommending that I answer "no" to the question about whether I have received a 1099-Q, even though I have?
A. Yes, but that assumes two things:
1. You have sufficient expenses to cover the box 1 amount.
2. There is no double dipping. You are not claiming a tuition credit or deduction based on the same expenses and/or those same expenses aren't covered by tax free scholarship. See the longer reply above for details headed Qualified Tuition Plans (QTP 529 Plans)
How do we know if turbo Tax is submitting the 1099Q on final tax papers BEFORE we hit submit and file?
I have read, and reread, and reread the explanation about double dipping. My question is - Will turbo tax reconcile the 1099Q and the 1098T for me? or do I have to somehow figure out all the numbers (bursar bill, scholarships, loans, fees, room/board, etc) with the 529 expenses?
@Jill21 If your 529 distribution does not exceed qualified Education Expenses, you may not need to enter it in TurboTax.
Click this link for more info on 1099-Q.
You will need to figure out what 'Other Education Expenses' (books, fees, etc.) to add besides the Tuition shown on the 1098-T. Room and Board can only be paid with 529 funds.
As long as Box 1 is a larger amount than Box 5, you should be eligible for an Education Credit. TurboTax is looking for 'out of pocket' expenses to make you eligible for the credit.
Click this link for info on How to Enter a 1098-T.
This Education Credit Calculator may help you.
You can also request a Line by Line Review, since we can't see your return in this forum.
Q. How do we know if turbo Tax is submitting the 1099Q on final tax papers BEFORE we hit submit and file?
A. TurboTax (TT) prepares a student info worksheet and a 1099-Q worksheet. Review both before submitting your return for e-file.
Q. Will turbo tax reconcile the 1099Q and the 1098T for me?
A. Yes. But, it's complicated and it is dependent on your input. It's helpful for you to have some idea of what the output should look like. See my longer reply, above, for an example.
Provide the following info for more specific help:
*parent
*1098T box 1 - $20124
*1098T box 5 - $13290
*not sure what the prepaid plan is, so I assume no
*1099Q box 1 - $10620
*1099Q box 2 - $6917
*parent is recipient
*r&b was part of the bursar bill - so that is included on the 1098T ??
*$3192
Thank you so much! I am determined to do better next year!!
The goal is for your 529 to cover the tuition, books, required expenses.
I recommend:
1098T box 1 does not include room and board, only qualified tuition expenses.
1098T box 5 can be partially allocated towards the room and board of $3,192. This leaves $10,098 towards college expenses
Back to box 1 $20,124 -10,098 scholarship = $10,026 on the 1098T plus any extra expenses, books, paper, whatever else was required to attend. My guess is you have a few more expenses and your 529 does completely cover your college expenses. IF your 529 is completely used for qualified college expenses, you do not even need to enter it.
Your son would then have taxable scholarship income of $3,192. Since the first $12,400 of income is not taxed, that is not a burden. Even if it is taxed, the rate would be very low vs your tax rate and you taking the hit and filing with the income as taxable to you via the 529.
@Jill21
I am also going to recommend you look at another of my answers for help. It will show you more options.
The gist of my question is different. I have entered both the 1099-Q and 1098-T for 2 college students. I have more than sufficient qualified expenses for what distributions were taken. Turbo Tax is inappropriately taxing only the earnings portion of the distribution (which can be found on line 8 of schedule 1, for your review). In my particular case, my income is too high to take advantage of an Education Tax Credit.
Will someone please help resolve this issue. I can't imagine I'm the only person having this problem. I believe it is internal to the program in how it handles earnings on 529 plans. We shouldn't have to guess or eliminate tax forms in the program to get the correct result.
You are correct, the problem is internal to the program in how it handles taxable earnings on 529 plans. It's complicated and errors can happen.
But, you're not getting the gist of the answer to your problem: Just because you have a 1099-Q does not mean it has to be entered into TurboTax. Just delete the 1099-Q and probably the 1098-T (if it continues to give you wrong answers). Both are only an informational documents. The numbers on them are not required to be entered onto your tax return.
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."
Thanks for taking the time to reply and for making the fix so simple. I hope I can depend on your advice. I have searched far and wide in the Turbo Tax community for such a simple answer; yours is the first. I spoke with a nice enough gentleman, a "tax expert" from Turbo Tax last night. He initially insisted that earnings from 529 plans were taxable. When I pointed out the non-taxable nature of earnings was the very genesis of the program and why it is so attractive to parents of future college students, then shared documentation to that effect, we moved on to why the program was not handling them properly. He's going to get back to me today.
I don't intend to understate the complexity of putting such a product on the market, but an effective "fix" for this particular problem hardly seems that difficult. It seems computational at it's core and yet I can't imagine how many people this might affect. It resulted in almost a $2000 difference in taxes owed for my family.
I have used Turbo Tax for as long as it's been available. Traditionally the product has been very reliable. Just enter the forms you are sent by your employer, institutions and the government, answer a few questions and you have simplified a very challenging annual rite. I have never encountered a problem like this and while your statements about these specific tax forms being "informational documents" may be accurate, for those of us who are not tax experts (those who might purchase this product and use it to complete what is a very tedious and frustrating endeavor), rely on it's accuracy and simplicity in accomplishing that task. Imagine if someone at Turbo Tax said, "If these two forms, as they've been sent to you by the institutions you trust, are possibly causing your tax bill to be higher because of the way your tax software program is handling them, simply ignore them, throw them away and delete them from the program." Since nobody from Turbo Tax said that, without someone like yourself being the Good Samaritan, we are left to come to that conclusion on our own. Given the serious nature of a failure to complete one's taxes accurately, can you imagine how reckless applying that tactic to solving your tax software problems might be?
Thanks again and happy tax day!
Even if you enter the IRS forms and go thru the whole process, when the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q, or expenses, on the actual IRS tax forms.
Several users (including me), in the past, have reported receiving a CP2000 letter, from the IRS, on 529 distributions. They replied that their child was in college and the distributions were for qualified expenses, which they listed, but they did not provide receipts.. They later received notices saying they were in the clear. In my case, I sent copies of the school's billing statements. I have not seen anybody reporting such notices more recently. I think the IRS is now more aware of the matching problem and that most 529 distributions are qualified.
Actually in my case, my distribution is covered by qualified expenses for both of my kids and there is a direct impact on the taxable income as reflected on line 8 of schedule 1.
I have read through all of the messages, and still confused. I am hoping the simple answer here is correct and that I don't have to include the 1099Q or 1099T. I would like some confirmation if possible.
My daughter is my dependent but files her tax return as she had too much income in 2021.
All of her college tuition was paid from a 529 plan.
She received at 1099T and a 1099Q, both basically with the same number (=Tuition Expense)
If we do have to add this to our returns I have a few questions:
1. Who puts which form on their tax return. 1099T on Parents and 1099Q on Dependent?
2. We are not looking for the education credit, just want to report properly so they cancel out and there are no taxes on the 529 payment. Is it possible for this to create a tax liability for my daughter or me? We have been doing this for 4 years and never ran into this in Turbotax (perhaps because she is filing her own return?)
Thank you.
If you are not looking for the education credit (and your student doesn't have scholarships that overlap the 529 distribution), it gets real simple: just don't enter either the 1098-T or 1099-Q on either return.
The 1099-Q and the 1098-T are only an informational documents. The numbers on it are not required to be entered onto your (or your student's) tax return.
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. 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
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."