My state wants more tax from our 529 activity, but I believe we filed a correct return

[new-frog]

Hi everyone:

My full-time college student child prepared their 2024 federal and Michigan taxes with TT. We have a 529 for tuition, etc. We followed TT's directions for both their and my returns using the forms from the 529 plan administrator (TIAA) and the university, but the state is now claiming we owe more tax due to some error I don't completely understand. Does anyone have any clues? Has anyone else had issues with managing 529 withdrawals when preparing returns? I do recall TT wasn't very clear on exactly what to do while entering this data, but in the end, TT determined the return was correct, and so we filed it.

Now, the state feels otherwise, and I cannot determine if their claim is correct or why. Lastly, if I need to, does anyone know where I might have someone well-versed in 529 plans evaluate the return and this letter?

Thanks in advance!!

[Hal_Al · Accepted solution]

I assume that   your 529 distribution was totally used for qualified expenses, so that no part of it was taxed on the federal return.

That means that none of the 529 distribution was included in your federal AGI that transferred to the state return.  That means that none of the distribution was included in the income you reported on your state return.  So, you don't take a 529 deduction on your state return because it was already deducted in the AGI amount transferred from federal to state.

The 529 interview, in the MI software program, is for those rare cases when the 529 distribution was taxable on the federal return but not the state. 

As the state letter says, "any amounts that......are already deducted on the federal return to arrive at the AGI, do not qualify for this subtraction" (deduction).  The state is most likely correct, you owe  the additional amount.

[new-frog]

Thank you, @Hal_Al! Yes, all expenses were qualified. Your explanation is helpful, and, as you note, they may owe the additional amount. What remains a mystery is why this happened in the first place, using TT. It doesn't inspire a lot of confidence in how they may handle Michigan's 529 plan.

[Hal_Al]

Q. What remains a mystery is why this happened in the first place, using TT?

A.  I don't have MI software, to give you a specific answer.  But, based on similar situations, it's a case of TT needing to handle every situation and the interview for a rare situation (a 529 distribution being taxed on the federal but not state) confuses the regular user.  It's usually covered in the "fine print", but easily missed. 

[new-frog]

Got it. May consider a human option for TY2025. Thanks again, @Hal_Al!