Mysterious Non-qualified Distribution

[SriniVenkat]

I use a certified tax preparer for filing. He uses his own filing software. 

I have a 1098-T from my son's college (Purdue University, Indiana) with Box 1 tuition expenses as $38K, Box 5 Scholarships as $855 and no other numbers.

I also have a 1099-Q from the 529 account showing Box 1 Gross Distribution as $17K - I received the check and deposited into my account after paying the $38K. In my mind, all this should be qualified distributions since I received less than half of the tuition amount that I paid.

However, in the tax form 5329, I see that line 5 is showing the distribution amount as $535 with a tax penalty of $54. Schedule 1 Line 9 and 1040 Line 8 also include this $535 amount.

As far as I read, I did not see any limitations on the 529 qualified distributions by income. Does anyone know what triggered this $535 non-qualified distribution & penalty?

My "certified" tax preparer is clearly not knowledgeable because he keeps saying 529 triggered it and IRS imposes limits without providing any details.

Thanks!

Srini Venkat

[Hal_Al]

@SriniVenkat  said "I also have a 1099-Q from the 529 account showing Box 1 Gross Distribution as $17K - I received the check and deposited into my account after paying the $38K". 

As long as the $38K payment and 529 distribution were in the same calendar year, you have a qualified distribution. If you had used TurboTax, I would tell you to look at the work sheets for details. 

 The apparent explanation is your tax peparer did it wrong. Unless your income is too high, you should also qualify for a tuition credit.  Unlike tuition credits, there is no income limitation on  a 529 plan distribution being tax free (qualified).