1099 Q and 1098 T

[califkim]

I am an owner of a 529 account which I set up for E, my granddaughter.  E is now a full time student and also works part time.  She files her own tax return and is not claimed by her parents as a dependent. 

For the year 2024, I withdrew $29,053 from the account which I used to pay for E’s tuition and a few other qualified expenses.  The 1099-Q was issued to me with me as the recipient.  E received Form 1098-T from her college in the amount of $29,950.

Discussions on this forum dealing with the same situation suggest that I DO NOT report the 1099-Q on my own tax return, as long as I have good records of what I spent on behalf of E’s, in case of the IRS audit.  Instead, E is to report the 1099-Q on her return, as well as the 1098-T to offset the distribution.  I wanted to confirm that my understanding is correct. 

My question is whether E will be qualified for education credit.

Your advice would be greatly appreciated.

[DavidD66]

You do not need to report anything on your tax return, as long as you used 100% of the distributions from the 529 account to pay qualified education expenses for E.  And yes, you should should keep the records of your expenditures for E's education.  Any education expenses paid for with the 529 funds are not eligible for the education credits.   If you paid all expenses that would otherwise be eligible for education credits, she cannot claim the credit.  While E is not required to report the 1099-Q, she may need to enter information from the 1099-Q when reporting her 1098-T, otherwise the program might incorrectly calculate an Education Credit she is not eligible.       

[Hal_Al]

Q. Discussions on this forum dealing with the same situation suggest that I DO NOT report the 1099-Q on my own tax return, as long as I have good records of what I spent on behalf of E’s, in case of the IRS audit.

A. Yes, that is correct. 

Q.  Instead, E is to report the 1099-Q on her return?

A. No. First, that is not allowed, because you are the "recipient" of the 1099-Q and the 529 distribution. 2nd, there is nothing on the 1099-Q that needs to be or can be entered on to her return. 

Q. How do we  offset the distribution?

A. On your own records and calculations. 

Q.  Will E qualify for education credit.

A. Yes. But there are some assumptions in that answer.  The tuition is barely enough to cover the 529 distribution.  But, I assume she has other expenses, room & board (even if she lives at home), books and a computer.  If that amounts to more than $3000, she is covered.  She enters the 1098-T on her return and ignores the 1099-Q because her own (and your) records say it's covered.  She uses $4000 of tuition to cover the ed credit. The room and board is used by you to cover the 1099-Q. R&B is not a qualified expense for a tuition credit, but it is for a 529 distribution. 

It assumes she is a half time or more undergrad, is either over age 24 or married  or provides more than half her own support with earned income.  Not being claimed as a dependent is not enough, she also must not meet the rules for being claimed. 

[califkim]

Thank you very much to both of you for your very thoughtful advice. 

To Answer Hal_Al’s question about E’s status, she is 23 years old and unmarried.  She is not claimed by her parents on their return because she provides more than half of her support from her part time work.

She is living at home with her parents so she does not incur a large amount of living expenses.    From what I gather from your kind reply, I assume that E will not qualify for her American Opportunity Credit since it would be a “double dip” situation if I cannot find at least $3000 in addition to the tuition to justify the qualified expenses. 

I make payments for all of her expenses out of a checking account that I set up to hold the proceeds from the 529 distribution.  There were a few thousands dollar balance left in the account at the beginning of 2024 (I withdrew more than needed in the prior year).  E usually sends me receipts of her expenses (text books and supplies) to ask for reimbursements.  From my records, she only asked for a little over $1K. 

Thank you again for your valuable advice.  I will delete the 1099-Q from my return.