Question about 1099-Q

[mehtaym]

Hello! I've seen several questions/threads on this topic and each one happens to be different situation. Therefore I am posting a new question here.

Parents - married filing jointly, AGI > $180K (not eligible for AOTC)

2 dependent children, both in undergraduate college full-time students

Both children have Coverdell IRA from which distrubtion was taken in 2022

Both children received 1099-Q

Both chidren also received 1098-T

Both 1098-T amount of Box-1 minus Box-5 is greater than distrubution reported on 1099-Q

Both children had income in 2022 and it is less than standard deduction, will be filing tax return.

The question - is it okay to not report 1099-Q on the children's return because the distribution from Coverdell IRA was fully used to pay tuition + housing (after adjusting for scholarships)

[Hal_Al]

Q. The question - is it okay to not report 1099-Q on the children's return because the distribution from Coverdell IRA was fully used to pay tuition + housing (after adjusting for scholarships)?

A. Yes. And that is the most common advice, on that topic, in this forum: Don't enter the 1099-Q if you know none of it is taxable.

Reference:  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." 

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. 

[mehtaym]

Thanks Hal_Al for your prompt response!

Does it imply that when preparing the tax return in Turbo-Tax, we need enter both 1098-T and 1099-Q for each child? Only then Turbo Tax will prepare the worksheets, right?

In prior years, when our AGI was such that we qualified for AOTC, we used to enter 1098-T in our (parents') tax return. This year, we'd have to enter the 1098-T on each child's return. Is that correct thinking?

[Hal_Al]

The 1098-T can be entered on both the parent's and the student's tax return. 

The 1098-T (and the 1099-Q) 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 (in your case report QTP distributions). 

If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2022 expenses".

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

Be advised entering all that in TT, can get messy. In particular, in the student interview, you should eventually reach a screen called "Amount used to calculate education  credit" Be sure the amount in that box is $4000, you claimed on your return. 

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" (or “Education Expenses used for a Tax Credit”) screen on the dependent’s interview.  Check the student information work sheet (part VI, line 17) to verify it was entered.  If not, the alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T.