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

[Jill21]

*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!!

[AmyC]

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. 

[Faithful Patriot]

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.  

[Hal_Al]

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." 

[Faithful Patriot]

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!

[Hal_Al]

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.

[Faithful Patriot]

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. 

[rjabara]

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.

[Hal_Al]

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." 

[rjabara]

Thank you!

[nagrath]

My situation is exactly the same, except based on what Turbo Tax suggests, I should take the American Opportunity tax credit. In order to do so, I must report something (up to $4000) as a 1098-T (If I don't, and just claim $4000 in qualified expenses, it won't accept it as there is no Taxpayer ID entered for the school). I think what I am supposed to do is: report the 1098 T on my return. Report the 1098Q on my son's return, then ALSO report the 1098-T there (to offset the 529 payments); I then say that $4000 OF THOSE EXPENSES were used to claim the tax credit on the parent's tax form (and I will have to pay tax on those $4000 as they are not covered by expenses , since no double-dipping). Is that correct? Or do I just list $4000 as the amount of tuition on the parental tax form, and the full amount on the student's form, and THEN report $4000 of that was used for the tax credit on the parental tax return?  I am tempted to skip all of it and forget the tax credit, though it looks to be about $2500, if I understand the calculation correctly. 

[Hal_Al]

Q.  Or do I just list $4000 as the amount of tuition on the parental tax form, and the full amount on the student's form, and THEN report $4000 of that was used for the tax credit on the parental tax return? 

A. Yes. Enter the 1098-T on both the student and parent returns.  TT will adjust (by $4000) on the student return. 

Q.  I am tempted to skip all of it and forget the tax credit, though it looks to be about $2500, if I understand the calculation correctly. 

A. Yes, the American Opportunity tax credit is $2500 when you use $4000 of expenses to claim it. 

You can only enter the 1099-Q on the students return, if he is the "recipient".  

If you need more specific help. provide the following details:

• 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
• 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 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• 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 an undergrad or grad student?
• Is the student a degree candidate attending school half time or more?

[nagrath]

Thank you! So I enter the 1098-T exactly as printed in both my and my son's return.  I have entered the 1098-Q already in his return. TT will then take the $4000 out I am using for the credit, his tax will go up by the tax on the $4000 of unmatched 529 payments (a tax of about $800) and my refund will increase by $2500, for a net gain of around $1700, which is not peanuts.  If I am mistaken with any of this, please let me know. Thank you!!!!

[Hal_Al]

Q. TT will then take the $4000 out I am using for the credit?

A. Yes, it should. It will present you with a screen, "amount used to claim the education credit". Verify that $4000 was used or change it.

Q. TT will then take the $4000 out I am using for the credit, his tax will go up by the tax on the $4000 of unmatched 529 payments?

A. Not exactly, The tax is on a percentage of the box 2 earnings.

Example (slightly changed from the older example above):
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship

   -$4000 used to claim the American Opportunity credit

 =$3000 Expenses that 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)

The tax rate will depend on his other income and when and whether the "kiddie tax" kicks in. So, probably 10-12%.

Q.   If I am mistaken with any of this, please let me know. 

A.  You're not mistaken. The difference between $2500 and the small amount of tax he pays, is not peanuts. But you haven't provided enough info to tell you if there is a better way. In particular, if your student has scholarship, is usually better to declare some of that scholarship taxable, rather than the 1099-Q earrings. 

Another common issue: most people still have enough expenses, counting room & board, for the 1099-Q  to be tax free even if claiming the AOC. In that case, the 1099-Q does not need to be entered.

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes (EIC. IRA contributions).

[nagrath]

OK, I got the credit after entering my 1098-T on MY return. However, 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? I filled out the 1098-T and 1099-Q as they came to me.