Parent vs Student - still confused where/if to report 1099-Qs and 1098-Ts

[shoeless_yo]

I'm new to college expenses this year. I've done a lot of searching. Answers from @Hal_Al on previous posts have been very helpful, but I'm still not sure what to do.

If I've understood correctly, I either have to choose between the $2500 American Opportunity Credit (AOC) credit OR not paying taxes on the earnings from the 529 plan (Qualified Tuition Plan - QTP). Is that correct?

Situation (numbers rounded for easier reading)

• Student is my child and dependent on taxes
• Student has part-time jobs, roughly $12,000 earned in 2024.
• 1099-Q parent recipient = $700 box 1 ($235 earnings box 2)
• 1099-Q student recipient = $14,500 box 1 ($5300 earnings box 2) - payment was sent to the school so recipient is the student
• Total from QTP = $15,200
• Total paid to school = $15,200 (actually $600 less than 1098-T + room/board, I don't know why)
• 1098-T (student recipient): $8100 box 1, $1250 box 5
• Room and board: $7700 (paid with QTP which should mean it can be claimed)

What I've tried so far...

• 1098-T goes on my (parent) taxes. We did not enter it on the student's taxes, but can/should we?
• I entered room and board under college expenses for #1 and #2, but not #3...

1. If my child/student puts the $14k 1099-Q on her taxes and I put the $700 1099-Q on mine, I get the $2500 AOC credit but she appears to be charged taxes on QTP earnings.
2. If I (parent) enter both 1099-Qs on my taxes, I lose the $2500 AOC credit. And from what I gather, this is not right/legal anyway?
3. If I don't enter any 1099-Q at all, I get $2500 AOC credit, but is this legal? It seems like this option means I'm not paying taxes on the earnings - which I thought I'd have to do if I take the AOC credit. Should student ignore the 1099-Q, too?

I'm assuming that one of us has to pay tax/penalty on the $2500 AOC credit since I pulled the full $15,200 (school charges) from the QTP instead of $12,700. Is that how it works?

I obviously do not want to break any laws or rules, but I don't want to pay taxes on QTP earnings if possible since I thought the whole point of a QTP was to avoid being taxed on earnings.

I think my primary questions are:

What should I do with each 1099-Q?

Should the 1098-T go on both the student/dependent and parent taxes?

[Hal_Al · Accepted solution]

Q.  If I've understood correctly, I either have to choose between the $2500 American Opportunity Credit (AOC) credit OR not paying taxes on the earnings from the 529 plan (1099-Q). Is that correct?

A. Yes, basically. But not exactly.

The first decision is easy, you do claim the AOC. It's too generous to pass up, if you qualify (your income is not too high). It only takes $4000 of tuition to qualify for the maximum $2500 AOC.  

Then you reduce the expenses you use for the 1099-Qs.  You will  pay tax on only some of the 529 earnings.

You also have to reduce the expenses you use for the 1099-Q by the amount of the scholarship.

So, you need to allocate expenses to the 3 tax attributes (AOC, 529, scholarship).  That gets tricky in TurboTax (TT), so I recommend short cuts. Do you have any book and computer expenses, in addition to the above? That would reduce the taxable amount.

Do not enter your 1099-Q because it's covered by $700 of room and board, we'll allocate to it.

Enter the 1098-T on your return with $4000 in box 1 and box 5 blank (this is allowed). 

So, you've allocated $4000 of tuition to the AOC and $700 of R&B to your 1099-Q. That leaves $7000 R&B and $4100 tuition for her ($11,100 total expenses).  $1250 (tuition) is allocated to the scholarship, leaving $9850 for her 1099-Q. 9850 / 14,500 = 67.93% of the earnings are not taxable. 32.07% is taxable. $5300 x 0.3207 = $1700 reportable  income. She gets a $1300 standard deduction (assuming she has no other income). So, $400 of taxable income. 

Again, I recommend a short cut*.  Enter her 1099-Q on her return. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked. At the 1099-Q screen, do check  the box "the recipient is not the designated beneficiary".  A few screens later, you'll get one simple screen to enter expenses ($8100 tuition & $7000 R&B). Press Done at the 1099-Q summary screen, to get there. Also enter the $5250 (1250 + 4000) in the box "Tax-free assistance".  This reports the earnings as taxable and claims the scholarship/tuition credit exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception.

*TT can theoretically handle it if you enter the 1099-Q correctly and then later enter the expenses in the 1098-T section, with adjustments, but it doesn't always come out right. So, yes, the 1098-T would normally go on both the student's and parent's returns. 

[shoeless_yo]

Thank you very much, @Hal_Al . I will try your suggestions soon and respond to this thread once I know how it works.

To answer one question - my student's book/computer expenses were included in the 1098-T since her school includes them in the fees.

[shoeless_yo]

@Hal_Al - I'm still waiting for my daughter to work on her taxes with me. In the meantime, I have some follow-up questions. I admit the shortcut steps are a little confusing to me. Thanks for your patience.

That leaves $7000 R&B and $4100 tuition for her ($11,100 total expenses). $1250 (tuition) is allocated to the scholarship, leaving $9850 for her 1099-Q.

Q: We enter $9850 on her 1099-Q, not the full $14,500? And adjust the basis (box 3) and earnings (box 2) proportionally ? Full 1099-Q shows $5300 earnings... 5300/14500 = 36.55%... 36.55% * 9850 = $3600 (new earnings - box 2)? And $6250 for basis - box 3?

Again, I recommend a short cut*. Enter her 1099-Q on her return.

Q: Or does this mean we enter the full $14,500 on her 1099-Q? And the full $5300 for box 2 and $9200 box 3?

A few screens later, you'll get one simple screen to enter expenses ($8100 tuition & $7000 R&B). 

Q: I entered $4000 expenses on my taxes for 1098-T so shouldn't she enter $4100 tuition on hers so as to not count the $4000 expense twice? I thought you said that, too ("That leaves $7000 R&B and $4100 tuition for her"). Or am I'm wrong because of this statement? => Also enter the $5250 (1250 + 4000) in the box "Tax-free assistance".

*TT can theoretically handle it if you enter the 1099-Q correctly and then later enter the expenses in the 1098-T section, with adjustments...

I might try this first to see if it works. Would that mean we enter the full $14,500 on her 1099-Q, then enter her 1098-T with $4100 tuition, $7000 R&B, and $1250 scholarship (4100+7000-1250=9850 expenses)? But I understand your comment that TT doesn't always do this correctly. Plus, that method seems to lead to an excess QTP distribution of $4650 ($14,500 - $9850) subject to penalty.

[Hal_Al]

Q. We enter $9850 on her 1099-Q, not the full $14,500? And adjust the basis (box 3) and earnings (box 2) proportionally ?

A. No. You enter the full $14,500 on her 1099-Q And the full $5300 for box 2 and $9200 box 3. You let TT do the calculation. 

Q.  I entered $4000 expenses on my taxes for 1098-T so shouldn't she enter $4100 tuition on hers so as to not count the $4000 expense twice?

A. No.

Q. Or am I'm wrong because of this statement? => Also enter the $5250 (1250 + 4000) in the box "Tax-free assistance"

A. Yes

"I might try this first to see if it works."

Normally, you enter everything exactly as is. In particular, be on the lookout for a screen “education expenses used for a tax credit”. It will usually be prepopulated (sometimes with $10K instead of the more appropriate $4K). Some users are saying they're not getting that screen. You situation is further complicated by the 2nd 1099-Q. Just Don't do it. 

[shoeless_yo]

I finally had time with my kid to work on her taxes. Using the shortcut @Hal_Al provided, my kid ended up with $177 more taxes owed (fed + state) than if we entered her 1099-Q and an adjusted 1098-T for her. On the non-shortcut method we did end up with the screen for “education expenses used for a tax credit” and a place to indicate that someone else claimed the education credit.

But since the shortcut method was so highly recommended, we are planning to go that route - unless you suggest otherwise.

Thanks again for all the help!