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Paid college tuition with 529 distribution - how to answer following question on TT.

We paid for my son's summer college tuition, room and board and books using a 529 distribution owned by parents.  On the TT question, "Did you take a tax free distribution from a 529 plan for payments toward a qualified education loan?" the last part is where I'm hung up.  I did take a distribution from the 529 BUT did not obtain or pay for a loan.  We used it to pay the school directly for the above expenses.  I'm hung up on the "loan" language. Do I answer yes or no on that question?

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8 Replies

Paid college tuition with 529 distribution - how to answer following question on TT.

Answer No 

Hal_Al
Level 15

Paid college tuition with 529 distribution - how to answer following question on TT.

Answer no to that question. Allowing 529 money to pay back loans was a recent change to the rules.  Later, in the educational expenses section, you will be asked to enter your actual expenses.  

But

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! 

References:

  1. 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." 
  2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

____________________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

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.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. 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. Another special rule allows you to claim the tuition credit regardless of whose money was used to pay the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

 

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board which is only qualified for the 1099-Q)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 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)

 

**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." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. A student, with no other income, can have up to $13,850 of taxable scholarship (in 2023) and still pay no income tax. 

Paid college tuition with 529 distribution - how to answer following question on TT.

Thank you both.  I have a lot to learn on the education piece, I can see.  🙂 

 

His only amount on the 1098-t is $2315 on box 1.  For two summer classes, his tuition was $1599.  All in, it was $3519 toward the university (meal plan and all random fees included) and then we had to add books on top of that.  So far, it seems like only the $2315 and the cost of books is being asked for for deduction purposes.  

 

I am not prompted to add anything in for room and board even though TT says I can deduct it if it was paid by "qualified education savings", which I assume includes 529s (right?).  I did not receive a 1099 Q.  I suppose because I won't own the 529.  

 

 

Hal_Al
Level 15

Paid college tuition with 529 distribution - how to answer following question on TT.

To get the R&B screen, you must enter the 1099-Q first (because R&B is only qualified for a 529 distribution).  Even then,  to get the screen to enter Room & Board, answer yes when asked if you have book expenses.

 

Q.   I did not receive a 1099 Q.  I suppose because I won't own the 529?

A. See "recipient" in the long winded discussion above. Somebody got a 1099-Q.

Paid college tuition with 529 distribution - how to answer following question on TT.

Thank you for your kindness and patience in answering my questions.  You've helped so much!  Have a great day!

taxmom42
New Member

Paid college tuition with 529 distribution - how to answer following question on TT.

This has been very helpful.  So if I choose not to enter the 10999-Q, am I still required to enter the 1098-T?

Hal_Al
Level 15

Paid college tuition with 529 distribution - how to answer following question on TT.

Q. If I choose not to enter the 10999-Q, am I still required to enter the 1098-T?

A. No.

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. 

If you claim the tuition credit, you do need to report that you got one.

 

Note, in the long winded explanation, above, that it is possible to claim a generous tuition credit (over $2000, based on your numbers) by paying a little tax on a portion of the 529 distribution earnings (box 2 of the 1099-Q). The 10% penalty is waived in that situation. 

 

KrisD15
Expert Alumni

Paid college tuition with 529 distribution - how to answer following question on TT.

If you used a distribution (1099-Q) to pay for tuition (1098-T) you cannot enter the 1098-T alone since it will show expenses (BOX 1) but not the distribution. You would need to reduce Box 1 on the 1098-T by the amount of the distribution.

 

Please read IRS Pub 970, it is easy to read and has some great examples. The IRS wants you to get the credit if you can, the difficulty is that you can move expenses and aid around to best fit your situation, and every situation is different. 

 

@taxmom42 

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