1099-Q and 1098-t

[busdrvr]

my daughter is a full time student.  We are paying her tuition.  I entered the info from the 1098-T(line 1  greater than line 5)  into our (parents) tax return.      I followed TT prompts and entered the info from the 1099-Q (that has my daughter listed as the recipient).  into our return.   the end result was a screen that said 'it looks like our daughter  has $1xxx of taxable income', from the whole exchange and I'm confused.   I was anticipating that the education tax credit we received would be reduced-because some of her tuition was paid from a 529 distribution- it was not.   Also confused as to why a "tax Free" 529 plan was going to produce a taxable event.

            TT asked me if some of the tuition was paid using any 529 monies and I sad yes.

            TT asked whos name was on the 1099-Q  and I said---our daughters.

Am I also then , required to enter the 1099-Q onto my daughters return?  She isn't getting "credit" for paying the tuition and I just added the 1099-Q info on our return.  can the 1099-Q be entered onto both ours and her tax return?  THANKS FOR ANY HELP   and SORRY if I am not explaining things well or using the correct terms.  I'm very new at this.

[ReneeM7122]

No, the 1099Q has to be entered only to one return.  

Here is an article about how to enter Form 1099-Q

Here is a general article about Form 1099-Q

[Hal_Al]

 Since she is the "recipient", the 1099-Q does not go on your return.  If it goes anywhere, it goes on her return. 

There are three things you can do with your Qualified educational expenses (QEE):

1. Allocate then to scholarships (so that the scholarship remains tax free)
2. Use them to claim an education credit
3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, until you tell it otherwise.

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1098-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B charge
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources

__________________________________________________________________________________________

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 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 even though it was "his" money that paid 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 (usually on the student’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 600= $240

You have $240 of taxable income  

**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. 

[jonesbshopper]

     Last year, I paid TurboTax an extra fee for live expert help.  The helper told me, as the parent, to report the 1099-Q & 1098-T on my return.   Hal_Al says that the student, not the parent,  should report these forms.   Who is right?

[Hal_Al]

The "recipient" reports the the 1099-Q.  That can be either the student or the parent (see above) and even the grandparent sometimes. 

The 1098-T gets entered where needed. On the parent's return to claim the credit. On the student's return to claim taxable scholarship. And, if needed, on both.

It depends on the details of your situation. 

[crash12_mn]

How can the parent's return do the proper calculation for taxable 1099-Q income if you don't enter the 1099-Q on the parent's return along with the 1098-T since the parent gets the education credit? Don't you need the 1098-T and the 1099-Q on the same return for TT to determine taxable income which then gets reported on the dependent student's return?

I don't understand what good it does to report the1099-Q on the dependent student's return since the full amount of the distribution might  not be taxable and the justification for that calculation was done on the parent's return. Why wouldn't you just report the net taxable income on the student's return and not enter the 1099-Q there? This is very confusing and big tax circle.

[Hal_Al]

Q.How can the parent's return do the proper calculation for taxable 1099-Q income if you don't enter the 1099-Q on the parent's return along with the 1098-T for the education credit?

A. The parent's return doesn't necessarily do the calculation.  The recipient's return does.

Q. Don't you need the 1098-T and the 1099-Q on the same return for TT to determine taxable income?

A. Yes and that is the recipient's return.

Q. Which then gets reported on the dependent student's return, right?

A. No. It will be the recipient's return and that could be either the parent or the student.

Q. Not all of the 1099-Q would be taxable if there were 1098-T expenses so I'm not even sure what good it does to report the 1099-Q on the student's return.

A. You enter it to do the complicated calculation to determine the taxable amount

Q. Why wouldn't you just report the net taxable income on the student's return?

A. You could manually calculate the taxable amount and enter it, but then you have to deal with the penalty (or penalty exception) that TT handles as part of that.

Q. This is very confusing and big tax circle.

A. Yes, But it can be avoided by carefully limiting your withdrawal (distribution) to NET expenses (after scholarships and the education credit).

 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”.

[crash12_mn]

My advice to anybody with a 529 or Coverdell ESA is to keep all the distributions tax free while your kid is your dependent and only take taxable distributions afterwards. That way there is zero interaction between your tax return and your child's which can get really confusing.