My son is nondependent who files own income tax. We withdrew 529 funds and used for his education. On which tax return does the 1099-Q and 1098-T go on? His or mine?

[tlopez1031]

If the QTP 1099-Q was issued to you it goes on your return.  You can claim this even if he is not your dependent.

Just remember that earnings on the 1099 (not basis) counter the school expenses.  Basically you can't double dip (your son and you for the same expenses).  You have to determine if you can chose who claims his personal exemption.  If he is still eligible for you to claim generally parent(s) benefit more since they are in a higher income bracket. 

If he does not qualify as your dependent if the money went to pay eligible higher level educational expenses your still good - just don't claim his exemption.  FInd out what eligible expenses he had and use the link below to track.

Are Distributions Taxable?  (depends)

The part of a distribution representing the amount paid or contributed to a QTP doesn't have to be included in income. This is a return of the investment in the plan.

The designated beneficiary generally doesn't have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later).  Link for figuring taxable portion (if any) https://www.irs.gov/publications/p970/ch08.html#en_US_2015_publink1000178534

[VinayS]

If I do not want to include my son as dependent (he files his own tax return) but I am the recipient in the 1098-Q and the entire distribution amount (basis and earnings)  was spent on my son's qualified higher education expenses. 

In this situation, TurboTax seems to simply assume that the distribution was not qualified and adds a substantial amount of tax (and probably penalty as well).

So, my question is: Where do I specify that the distribution was indeed for qualified expenses and hence should not be taxed?

Thanks.

[Carl]

If I do not want to include my son as dependent (he files his own tax return) but I am the recipient in the 1098-Q and the entire distribution amount (basis and earnings) was spent on my son's qualified higher education expenses.

If you qualify to claim your son as your dependent, then you have a choice to actually claim him or not. But your son does not have a choice. The key word is *qualify*. If you *qualify* to claim your son, then your son does not have a choice and must select the option on his tax return to indicate that "I can be claimed on someone else's tax return". It does not matter if you actually claim him or not.

For the 1099-Q, the person who's SSN appears in the "Recipient's TIN box will report it on their tax return. If that's you (the parent) and you do not claim your son as your dependent, the 100% of the 1099-Q distribution is taxable income to you the parent.

So, my question is: Where do I specify that the distribution was indeed for qualified expenses and hence should not be taxed?

If the distribution was to you, and you are not claiming your son as your dependent, then it's not a qualified distribution. It's fully taxable to you.

I suspect that you incorrectly believe that you don't qualify to claim your son as your dependent, when you do. Take note of the below and what it does "not" say or specify.

--------------------------------------

First, who claims the student as a dependent?

If the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as a full time student for any one academic semester that begins during the tax year, (each institution has their own definition of a full time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

Then:

The parents qualify to claim the student as a dependent on the parent's tax return . Period, End of Story. But one thing I want to point out here. The parents *QUALIFY* to claim the student. The parents are *NOT* required to claim the student as a dependent. But even if they don’t, since they *qualify* to claim the student, then if the student will be filing their own tax return the student is *REQUIRED* to select the option for “I can be claimed on someone else’s return”.  To reiterate:

If the student qualifies to be claimed on the parent’s tax return, then the student can not take the self-exemption on their own tax return, no …matter…what.

--------------------------------------

Take note that the student can only provide more than 50% of their own support two possible ways.

 - The student was self-employed or had a W-2 job and earned sufficient income to justify a claim to providing mroe than half of their own support. The student's "EARNED" income would also have to be more than the total of all third party support (scholarships, grants, 529 distributions, gifts from Aunt Mary, money from parents, etc.)  Third party income *does* *not* *count* for the student providing their own support.

 - The student is the *primary* borrower on a *qualified* student loan, and sufficient funds were distributed to the student during the tax year to justify a claim of providing more than half of their own support. The amount distributed also has to be more than the total of all third party income received by the student in the same tax year.

Also note that there is no income limits. The student could earn a million dollars (literally!) and still qualify as your dependent. The student's earnings do not matter.

[Hal_Al]

"If the distribution was to you, and you are not claiming your son as your dependent, then it's not a qualified distribution. It's fully taxable to you."

That statement is not true.  Your son does not need to be your dependent, he only needs to be the beneficiary of the 529 plan. 

"On which tax return does the 1099-Q and 1098-T go on? His or mine?"

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.

The 1098-T goes on your son's return. BUT, you and your son have to coordinate the educational expenses.  You can claim  the tuition paid, for the 1098-Q, but he cannot claim the same expenses that you claim, to claim a tuition credit.  Example:

Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship

   -$4000 used to claim the American Opportunity credit (on your son's return)

 =$3000 Can be used against the 1099-Q ( on your 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.

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." 

[AN16]

All,

We withdrew the 529 distribution. Paid the expenses. However, we took out a few hundred more.

I do not want to claim my son as a dependent (due to other reasons) as we don't get any of the credits due to income limits either. As mentioned above, my son does not have to be a dependent to get the credit for these expenses.

But, if I remove my son as a dependent, this software does NOT allow linking the expenses to the 1099-Qs. Since the link is through the list of dependents.  This increases the tax amount substantially since it taxes you on the entire gain reported on the 1099-Q, and if you don't go into the forms you will miss it (this is a major issue with TT).

My question is how does one connect the expenses and 1099-Q to each other for TT to calculate the small amount of the tax?

[Hal_Al]

@AN16 

Delete the dependent and delete the 1099-Q and start over. At the beginning of the 1099-Q interview, you are asked who the beneficiary was. "Someone not listed" is a choice.  When you select that, TurboTax (TT), later, gives you a screen to enter the expenses without entering the 1098-T.  The problem comes when you first enter a dependent student and then change you mind. 

If your son is claiming the tuition credit or deduction, you have to coordinate with him. You cannot double dip. He cannot count the same tuition money, for the tuition credit,  that gets you an exclusion from the taxability of the earnings (interest) on the 1099-Q  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. Room & board and computers and books are also qualified expenses for a 1099-Q.

"I do not want to claim my son as a dependent (due to other reasons) as we don't get any of the credits due to income limits either. 

Although you are allowed to not claim your dependent; he still must check the box on his form 1040 indicating that he CAN be claimed as a dependent.  Checking that box limits what he can claim.  In particular, he is not eligible for the refundable portion of the education credit (the $1000).  If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  

[AN16]

Thanks a lot! Really appreciate the response. Will try that. 
Not sure why they don’t just let you modify on the form page and avoid having to redo all this. It’s just a simply entry on the student worksheet. Of course it is tied to the dependent’s name but they can allow adding  a new there. But the process you describe is worth the little extra time. 

He will not be double dipping. Just as an FYI, he filed on his own before us and did not check with us and so did not check that he can be a dependent.He did this for the stimulus check. 

So when we try to e-file, our retune gets rejected. So, we either have to file by paper if we leave him as a dependent, and then possibly have explain via letters, which I’d hate to do,  or simply remove him. His removal does not affect our return one bit given the new Trump tax law except for the educational expense issue which is large. 

He has to file a 1040x and change his status and we checked this with IRS. He will also return the stimulus money per instructions they gave us.

All the nuances that one would not think about, especially a 20 year old. Thanks again for the very helpful answer. You must work for TT.