Parent is recipient of 1099Q distribution that was used to pay child dependent beneficiary qualified education expenses. TT-2025 appears to incorrectly calculate the distributation as taxable..

[robca2010]

The parent took a distribution from their 529 account (parent is the account owner) in 2025 to pay their dependent child beneficiary's qualified education expenses, for example college tuition.  The dependent child is named as the beneficiary on the 529 account.  The beneficiary that is on the account is also the same for which the funds that were withdrawn from the 529 were used.  Let's say that the total qualified education expenses were $5000 for the 2025 calendar year.  

The amount that was withdrawn from the 529 account in 2025 was $5000 that was used to pay for qualified college expenses that were incurred in 2025.  The child received a 1098t-2025 of $5000 for the 2025 expenses.   There were no scholarships received in 2025, so the $5000 were all out-of-pocket expenses incurred by the student.

Because the parent took the distribution, the 1099-Q at the end of the year was issued to the parent as the recipient.  

On the parent's TT return, the parent was entered as the recipient of the 529 distribution and the child as beneficiary for which the distribution was used.  The TT return shows that the beneficiary's student information sheet Part VI Education Expenses is showing the allowed qualified education expenses for the 529 plan of $5000.  There are no credits this year for the AOC or life-time-learning credit.  So, there should not be any taxes paid on the 529 distribution earnings.  Yet, the student information worksheet  Part VIII 2g and 2h (Adjusted Qualified Higher Education Expenses Applied) for the purposes of calculating the regular taxes are 0.  Because the AQEE is not being subtracted from the distribution, TT then goes and calculates the tax on the full earnings.  

By-the-way, if the beneficiary is entered as the recipient with everything else being the same, then Turbo Tax does report that no tax is due and the 1099-Q should be deleted.  So, TT seems to be miscalculating when the taxpayer (parent) is different from the beneficiary.

Let's also say that for the purposes of the tax calculation that the basis was $3000 and the earnings was $2000.    

However, under the column of "For the purposes of the 10% additional taxes" the $5000 is reported there.  

So, in the end turbo tax is calculating the regular tax rate on the $3000 earnings but not applying the additional 10% tax penalty on the distribution.  So, it is correct in not applying the 10% tax penalty.  But wrong in that it should not be calculating tax on the earnings.

However, other posts I have seen say that if the parent takes a 529 distribution and pays for their child beneficiary's qualified expenses in the same calendar year and the distribution is less than the AQEE, then any earnings on the 529 distribution are not taxable and not reportable.  

If that is true then, TT appears to have a bug and is not calculating correctly when the above information is input.  There should be no tax on the earnings calculated by TT.  It's really hard to know if TT is miscalculating or there is something important to know where the tax laws intend that the tax on the earnings in this case is actually due.  Some suggest just don't report the 1099-Q if no tax is due.  But we often want to put the data in TT expecting TT to calculate correctly and help the user know whether taxes would or would not be due in their particular case.

I also looked at the 2025 Tax Pub 970 Tax Benefits for Education.

These are the only mentions i could find in Pub 970

"What is the tax benefit of a QTP? No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses (AQEE)" and "The recipient of the distribution generally doesn’t have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to AQEE (defined under Figuring the Taxable Portion of a Distribution, below). "

[Hal_Al]

TurboTax is broken*.  Just don't enter the 1099-Q.

The 1099-Q is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you probably can. 

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 don’t need it). 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.

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”.
3. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 

*One frequent problem, I've seen in this forum,, and it carries over from last year, is that TT has allocated $10,0000 (maybe only $5000, in you case) of expenses to the tuition credit, instead of the more appropriate $4000 (or $0 if you  are not claiming the credit).  In the past, TT provided a screen  titled  “education expenses used for a tax credit”. It was usually prepopulated (often with $10K). You could change it for the amount you want to allocate to the ed credit. So far, this year, I haven't found that screen, even after recent updates.

If you don't get that screen, you can check the student information worksheet. You can manually change it there (line 18). Make the change in the first column, on the left. It was line 17 prior to 2025.

[Hal_Al]

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 usually should claim the tuition credit before claiming the 529 plan earnings exclusion (unless your income is too high).  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. Room and board (R&B) are also qualified expenses for the 529 distribution, but not the AOC (R&B are also not qualified expenses for a scholarship to be tax free).
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)

   -$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 distribution is qualified, so 40% of the earnings 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 $15,750 of taxable scholarship (in 2025) and still pay no income tax. 

[user17760278101]

I agree with your observations and comments.  Surely, for the scenario I described above, TT-2025 unfortunately is broken.  That is very disappointing.  I have children in higher education and doing 529 withdrawals over the past 5+ years.  In previous years, when the child was the recipient and I enter that data into TT, it calculates everything correctly.  This is the first year where things were done a little differently and the parent was the recipient.  Unfortunately in this case even though Box-1 on the 1099-Q was covered by all college expenses on the beneficiary 1098-t (no scholarships and no AOC or LLC) and clearly shown on the info sheet, it does not subtract that amount from the 1099-Q distribution amount.  You see on the worksheet that it incorrectly subtracts 0.  It then calculates the tax on the earnings and then uses the corresponding tax to reduce the refund.

It could be because of the hidden $10,000 amount that you mentioned in your reply below.  I will check into that further.

Thanks for the tips regarding "TT has allocated $10,0000 of expenses to the tuition credit" and "TT provided a screen titled 'education expenses used for a tax credit'. " 

Yes,  I have seen that screen in past years.  It was very tricky to get.  I believe you had to remove all the child education expenses and then if you applied a certain sequence for adding those things back in, then that prompt would sometimes appear.  I may try to delete the education profiles and go through past notes to see how to get that prompt again.  Also, look at editing Line-18.  If I find something to work, I'll report back on this thread.

I also tried the same scenario in a competitive online tax program.  If you put in the same information, it correctly calculates everything that no tax is due.  This isn't rocket science and Turbo Tax should be calculating correctly.  The user should be able to enter all their tax information.  TT should then prompt with the appropriate questions and then properly calculate the user's tax for their scenario.  

I agree that if the AQEE is sufficient to cover the 1099-Q distribution, then no form needs to be filed.  However, it is very unfortunate that TT is not calculating correctly for those who may have a partial overage where some tax is due.  In this case TT is calculating the tax on the full earnings and not correctly prorating when some, but not all of the distribution is in excess of the AQEE. 

[robca2010]

I agree with your comments.  However, for this case since the parent did the distribution, the 1099-Q was issued to the parent as recipient and not the child.

The other thing to note that for this scenario AOC was not being applied for various reasons because the student didn't qualify for AOC.  The student was less than part-time in both semesters for the year.  So, AOC was not an option.  Nor, any scholarships.

This particular scenario was very simple.  The parent paid for the student's 2025 college tuition expenses all of which were reported on the student's 1098-t.  The parent entered both the student 1098-t, which TT correctly includes as the AQEE on the student information sheet. Then the parent entered the 1099-Q, which was issued in the parent's name since they took the distribution from their 529 account.  

There were no other AOC, LLC, or scholarships to affect the calculations.  Parent just withdrawing money from their 529 account to pay the child's tuition.

This is a bug with Turbo-Tax and should be fixed.  

Yes, one work around is if there were sufficient AQEE to cover the entire 529 distribution, then no 1099-Q needs to be submitted.  Just delete the 1099-Q.  However, for those make a distribution slightly in excess of the AQEE, then they have to include the 1099-Q on their return, and TT is not calculating correctly.

[Hal_Al]

Less than half time still qualifies for the Lifetime Learning Credit (LLC).  But, less than half time does not  qualify room & board for the 529 distribution.

Books and computers do not qualify for the LLC.  The LLC is 20% of tuition and fees.  Paying tax on some of the 1099-Q to get the LLC is not as lucrative as doing it for the AOC.  But, it depends on your numbers.