Question on Form 1099-Q

[Thomas2023]

Hello,

Wondering if I can get some clarity around this, please.

My daughter is 19 years old and a full-time college student(no work involved). I claim her as my dependent and have set up a 529 college fund for her. The form 1099-Q has her name in the Recipient's name box. Similarly, Form 1098-T has her name as well.  All the distributions from 1099-Q are used to pay for the college.

Box 1(Form 1099-Q): $ 13,192.88

Box 2: $ 4886.98

Box 3: $ 8305.90

The tuition/boarding was the exact amount of $ 13192 (since it was paid directly to the college). However, the 1098-T form shows a different amount of $ 5,770.81. I am not sure how that has been arrived at.

Based on the above situation, do I  need to file 1099Q and 1099T? Or can I skip this section in TT? I am assuming I will need to file this under my tax return.   Also, since the adjusted income was greater than 180,000, I was not eligible for education credit.

Thanks!

[Hal_Al]

Room and board are not included in box 1 of the 1098-T, only tuition and fees.  . Books and other course materials, including  a required computer, are also qualified expenses not shown on the 1098-T. You look to your billing statements for that information. But, you really don't need it.

The 1099-Q and the  1098-T are only informational documents. The numbers on them 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, if you qualified.  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”.

[Thomas2023]

Thank you for your response.

Just so I am clear about my understanding.  If my child/beneficiary has sufficient educational expenses, including room & board to cover the distribution, I need not enter anything in Turbo Tax for the education section.

[Hal_Al]

Q.   If my child/beneficiary has sufficient educational expenses, including room & board to cover the distribution, I need not enter anything in Turbo Tax for the education section, of my return.?

A. That's correct. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. 

There is no need to enter anything in Turbo Tax for the education section, of the student's return, either, unless there is a chance that some of his scholarships, if any, are taxable. 

[YM23]

I'm in the same situation as Thomas2023. You said we don't need to enter the 1098T and 1098Q in our tax. It's great. But, I'm very confused about this section. I have a question about this "When the box 1 amount on form 1098-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms.". The 1098-Q is under my son's SSN. When I try to enter the 1098-Q under his tax, the Box 2 of 1098-Q is counted under his income and he has to pay tax. Why is it ? All Box 1 of 1098Q is paid directly to the school. I enter it under Education section "ESA and 529 qualified tuition programs (Form 1099-Q)". I didn't enter the 1098-T on his tax since someone said he's dependent and it should go to the parent's tax. My AGI is above $180K. If we need to enter 1098-Q under his tax, what should we need to enter so the qualified expense does not count the box 2 of 1098-Q as his income? Thank you.

[Hal_Al]

Q. When I try to enter the 1098-Q under his tax, the Box 2 of 1098-Q is counted under his income and he has to pay tax. Why is it ?

A. You haven't entered any expenses to off set the Box 1 amount.  When the box 1 amount is NOT covered by expenses, all or part of the box 2 amount is taxable (not the box 1 amount).

Q. I didn't enter the 1098-T on his tax since someone said he's dependent and it should go to the parent's tax.

A.  It goes  to the parent's tax, so they can claim the tuition credit. It can ALSO go on the student's return to offset the 529 distribution. But, beware, you cannot use the same expenses to claim the 1099-Q offset, that you used to claim the credit. Simple example: there was $10K in box 1 of the 1098-T. The parent used $4K to claim the credit. The student can only use $6K of the box 1 amount (the program will theoretically handle this). But, he can also use room and board, books and a computer. You should reach a screen asking How much was used to claim the credit. Be sure the amount in the box is $4K. 

But, again, if you KNOW none of it is taxable, don't enter either the 1099-Q or 1098-T, on the student's return. It's complicated and mistakes are frequent. 

[YM23]

Thank you very much. Please help me to understand this section since this is new to me. I'm still confused.

A. You haven't entered any expenses to off set the Box 1 amount. When the box 1 amount is NOT covered by expenses, all or part of the box 2 amount is taxable (not the box 1 amount).

Q. In order to entered expenses to offset the Box 1, I need to enter it in his "Expenses and Scholarships (Form 1098-T) correct? But, 1098T goes to the parent's tax, how can the student's off set the expenses? When I try to enter 1098T on my son's tax, I got the message on his tax return "It looks like you're trying to enter the education credits for yourself, but earlier you indicated that you were claimed as a dependent on someone else's return". It seems the 1098 T is counted to AOTC, and we can't double dip the expense in 1098Q. Then, how does the parent use 1098T?

[AmyC]

1. No, you are not offsetting the full amount. That is only if you have a taxable distribution. You stated earlier in the thread that all of the 1099-Q went to qualified expenses. The IRS is clear, do not enter. 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. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions.

Page 45  repeats: Don't report tax-free distributions (including qualifying rollovers) on your tax return.

2. The student has no concern and does not enter.

3. When you enter the 1098-T on your return, you will be able to move properly through the screens without the Q in the way.

4. The 1098-T is only entered in the student's return if there is taxable scholarship income.

5. The parent uses the 1098-T for any additional expenses not covered by the Q in order to claim the AOTC, if qualified. 

The phaseout for  AOTC is a modified AGI of:

• $80,000-$90,000 or
• $160,000- $180,000 MFJ

Example:

• $15,000 529 distribution. $12,000 went to room and board with $3,000 towards tuition, books, etc. The Q is used and not entered.
• 1098T shows $12,000 tuition. Plus you have additional expenses of $1,000 for books and miscellaneous. Total $13,000 tuition and books.
• The 529 paid $3,000 towards the tuition and books. If we subtract the $3,000 from the amount paid for tuition and books, we have $13,000- $3,000 = $10,000 actually spent out of pocket.
• Any amount over $4,000 for tuition expenses paid out of pocket is extra, not needed for calculating the AOTC.*
• In this case, the Q is not used, full AOTC is received.

@young23 

[Hal_Al]

If you know none of the 1099-Q is taxable, just don't enter it.  As you've discovered it's complicated and messy. Avoid the hassle.

If you NEED to enter it to calculate the taxable amount, you MUST enter the 1099-Q before entering the 1098-T and other expenses. 

To get the screen to enter Room & Board, answer yes when asked if you have book expenses.

You will eventually reach the screen "amount used to claim the education credit" (on the parent's return). If TT has not prepopulated that with $4000, you should enter (or change to) $4000.

[YM23]

@AmyC and @Hal_Al, thank you so much for taking your time and explaining to me. I appreciate it.

[finanal101]

My daughter has room and board expenses to offset scholarship funds, but TurboTax states room & board must be covered by 529 or Coverdell. She has a Florida Prepaid 529 Plan that covered her tuition. Can she use the room & board expenses since she received a provost scholarship from her school and florida bright futures scholarship?

[Hal_Al]

@finanal101  said "My daughter has room and board expenses to offset scholarship funds". 

Only tuition , fees, books and other course materials (including a required computer) are qualified expenses for a scholarship to be tax free.  Room and board cannot offset scholarship money.  So, yes, you can use room and board to offset the 529 distribution.  But, that scholarship would usually be reported as taxable income, on the student's tax return. If that is her only income, and the amount is less than $13,850 (for 2023), then she does not need to file a tax return. 

You don't mention whether you qualify, based on income,  for an education credit, Be aware that  

there is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.

[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 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.