Prepaid 529

[Howard18]

I completed a tax return for my dependent son who is in college.  He worked and had interest income. He is getting taxed on his prepaid tuition. The income amount is coming the earnings on a form 1099-q. Please assist.  I can give more details if needed. 

[SharonD007]

Form 1099-Q only needs to be reported on the tax return of the person whose SSN is on the form if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. In that case, the earnings on the excess distribution would be taxable income.

First, determine if the Form 1099-Q needs to be reported on the tax return by comparing the withdrawal with the tuition paid on the 1098-T added to other qualified educational expenses. To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement. Please review the TurboTax articles Guide to IRS Form 1099-Q: Payments from Qualified Education Programs and What is IRS Form 1099-Q? for further details.

Secondly, enter the 1099-Q if the withdrawal exceeds the educational expenses by following the directions in the TurboTax Help article Where do I enter a 1099-Q?

[Hal_Al]

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.

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”.
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." 

If you do enter the 1099-Q, you then have to enter your adjusted qualified educational expenses (AQEE) so that TT can calculate the taxable amount, if any.