My 529 earnings are being taxed. I’m the recipient and my son is the beneficiary. What am I doing wrong? All distributions are being used for qualified educational exp

[nagrath]

If it helps, here are the answers to your questions:

• Are you the student or parent.  Parent
• Is the  student  the parent's dependent.  Yes
• Box 1 of the 1098-T  61860.5
• box 5 of the 1098-T 1402.5
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not) Don't think so
• Is any of the Scholarship restricted; i.e. it must be used for tuition  not known - NY TAPP
• Box 1 of the 1099-Q  77729.50
• Box 2 of the 1099-Q  38291.36
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?  Students
• 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.   16257.00
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers  1451.5
• How much taxable income does the student have, from what sources  4296, all unearned (div & int)
• Are you trying to claim the tuition credit (are you eligible)?  YES
• Is the student an undergrad or grad student?  Undergrad
• Is the student a degree candidate attending school half time or more?  YES

[Hal_Al]

Q. I was not asked about the amount being used for the education credit when I filled out his return,, nor when filling out mine. How can I trigger that question?

A. On the Student Information Worksheet (abbreviated Student Info Wk on the forms list), go to part VI and change line 17 (“Used for credit”) to 4000. Make the change in the first column.  That will automatically change the other columns.  You can use this technique in the download versions of TT. 

Alternate: Some people are saying they're not getting the  “Education Expenses used for a Tax Credit” screen on the dependent’s interview.  Check the student information work sheet (part VI, line 17) to verify it was entered.  If not, the alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T on the student's return. 

[Hal_Al]

@nagrath said  "If it helps, here are the answers to your questions"

Yes, it helps, if you have an idea of the outcome, to know if TT is doing it correctly. 

Caveat: I only did the math once, did not check it

You have $ 61861 + 16257 + 1452 = $79,570 of Qualified Ed expenses (QEE)

You have $79,570 - 4000 - 1403 = $74,167  of Adjusted Qualified Ed expenses (AQEE)

$77,730 - 74,167 = $3563 shortfall in QEE for the 1099-Q

3563 / 77730 = 4.58% of the earnings (box 2 of the 1099-Q) are taxable 

0.0458 x $38,291= $1755 Taxable income on line 8z of Schedule 1 (Expected TT outcome)

What if you make the scholarship taxable? None of the $1403 will actually get taxed because of the increase standard deduction (explained in previous reply).

$79,750 - 4000 = $75,750 QEE

77,730 - 75,750 = $1980 Shortfall

1980 / 77730 = 2.55% of earnings are taxable

0.0255 x 38,291 = $975 Taxable income on line 8r of Schedule 1 (Expected TT outcome)

$1755 - 975 = $780 difference in reportable income. The kiddie tax will apply ($93 savings at 12%, $171 at 22%). 

Entering in TT gets a little  trickier (show the scholarship as being used for room & board).

The fact that NYS TAP stands for Tuition assistance program might indicate that it is restricted. But, a cursory Google search seems to indicate that any "cost of attendance" (including R&B) qualifies. 

[nagrath]

Ok, so I managed to get to that question (student info section was the trick) and finished up my son's federal return. He was taxed on the portion of the 529 payments no longer covered by the expenses because of the $4000 taken to qualify for the credit).  Now my state (NY) is asking if he had any 529 withdrawals not covered by expenses - do I report the same amount that he was taxed on here? or not, because his expenses actually DID cover all of his 529 withdrawals? (but using $4000 toward the tax credit caused some of the 529 to become taxable)? 

[Hal_Al]

I'm not familiar with NY forms of TT software. 

That said, I vaguely remember another case, this season, where the user actually go a deduction for that. Like NY was compensating him for being taxed federally on the NY 529 plan. Weird!

I suggest you try entering the taxable amount and see what it does. 

[nagrath]

Thanks, will give it a try and see what it does.  Hardly seems like I should be taxed on that if I am not getting the benefit of the tax credit, but...who knows.  I haven't made it to finishing my own State return to see what it does with all that information. The State apps are pretty bare bones help wise, too, alas.  

[nagrath]

Taxed him an additional $86. Still come out far ahead, but annoyingly difficult to get the "right" answer about how to do this.

[Hal_Al]

What line on the NY form is the 529 income showing up on? I found the NY instructions and it kinda confirms what I remembered (subject to interpretation).

If the income is showing up on line 22, I think you change your answer to no ( asking if he had any 529 withdrawals not covered by expenses). 

If it's showing up on line 30, I think it's actually a deduction. 

Look at the Instructions for lines 22 and 30 at

 https://www.tax.ny.gov/forms/html-instructions/2022/it/it201i-2022.htm

[nagrath]

It's putting the amount I declare as non-qualified in line 22; it is putting a different number in line 30, seems to have something to do with 529 Earnings. If I make the nonqualified withdrawals = 0 (say "no") line 22 goes to zero and line 30 stays the same.  I will look at the instructions and see what I think. Thank you!

[nagrath]

The instructions are completely unclear - I did NOT make any unqualified withdrawals, I just treated some of them as unqualified to get the tax credit on my federal return.  I may just declare it and pay the $80 so I don't have to worry about anything. 

[Hal_Al]

This is mostly curiosity, but what are the numbers on lines 22 and 30? And did TT give you $1755 Taxable income on line 8r of Schedule 1 on the Federal return?

[Hal_Al]

Obviously my entire knowledge of the NY rules is limited to what I just read in the instructions.

That said, it's pretty clear to me,  that, unlike on the federal, you do not have to make any adjustments in your qualified distribution to account for the fact that you claimed the tuition credit.  I would answer that question no. You did NOT "make a withdrawal (other than a withdrawal to pay the higher education expenses of the designated beneficiary)". 

[nickl1]

I have the same sort of issue.  Part of my QTP is being reflected as taxable, even though the entire amount was paid to the school for eligible expenses.  

When I look at the form itself, under Qualified Tuition Program (QTP) Computation of Taxable Income, the line 2c "adjusted qualified higher education expenses" are $5,000 less than the total distribution (line 1) as reflected in by 1099 Q.  I also entered a $5,000 scholarship as reported on the 1098 T for my son.  I adjusted the expenses upward when entering the 1098 T to reflect the actual eligible expenses paid beyond wht was reported by the college, but it's not adjusting the expenses on this form.   

I suppose I can just remove the 1099 Q from his return based upon prior advice from the site.  It just seems strange that I can't adjust Turbo Tax to reflect the actual situation.

[SharonD007]

The 1099-Q should be reported on the tax return of the person whose SSN is on the form and it only needs to be reported on the tax return if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement and the IRS link on Qualified Education Expenses.

To determine if you need to report the 1099-Q, add up the tuition paid from the 1098-T in box 1 plus the qualified education expenses and subtract the scholarship. If the total is more than the amount in box 1 of the 1099-Q, you do not need to report it. If the total is less than the amount in box 1, some of the earnings in box 2 of the 1099-Q will need to be report the 1099-Q on your tax return as ordinary income and you will pay an additional 10% penalty tax as well on that amount. TurboTax will ask you questions as you enter the 1099-Q and make the calculations. The gain is not reported, if it was used for qualified education expenses.

You can report the 1098-T on your tax return if your child qualifies as your dependent. You may also qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit if it is not for the same expenses that were paid from the 1099-Q withdrawal. When a student’s school expenses are paid with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense. For example, If the 529 Plan withdrawal was $5,000 and the tuition and qualified educational expenses are $10,000, you can claim a $1,000 lifetime learning credit on $5,000 of expenses, and the qualified expenses on your 529 plan will be reduced by $5,000.

Please see the TurboTax article What Are Education Tax Credits? for additional information.