1099-Q and should my daughter file a tax return?

[ram01]

My daughter is the recipient on a 1099-Q form as she received distributions from a 529 plan opened by a relative. Her 1099-Q form has $2685.92 in Box 1 Gross Distribution and $837.84 in Box 2 Earnings. I really don't understand the gross distribution/earnings and how this works. The amount from the 529 plan was used to pay a part of her college tuition fees and we paid the remainder (90%) of the tuition fees. We claimed her as a dependent and reported her 1098-T on our tax returns. She also received a 1099-INT form for a  $130 interest from savings. She had no other income in 2019. Does she need to file a tax return?

[Hal_Al · Accepted solution]

No, she does not need to file a tax return.

You do not  even need  to get into the calculations of whether any of the 1099-Q is taxable.  The fact that her total potential taxable income (838 + 130 = $968) is less than $1100, means she does not need to file.

A student- dependent  must file a tax return for 2019 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,200.
2.          Unearned income (interest, dividends, capital gains or taxable portion of a 529 plan distribution) of more than $1100.
3.          Unearned income over $350 and gross income of more than $1100
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2100 ($12.200 if under age 18)
5.          Other self employment income over $400, including box 7 of a 1099-MISC

Read on, for more info.

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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. 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.

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." 

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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

60%x600= $360

You have $240 of taxable income (600-360)

[ram01]

Thank you very much for the instant response.

[ram01]

Hello Sir,

I had a follow up question. I realized that the interest from savings was $227 and not $130 as mentioned earlier. The total taxable income of 838+227=1065 is still under $1100 so I guess she still doesn't need to file.  I also wanted to let you know that on the 1098-T form that we reported on our tax returns, Box 5 (Scholarship or grants) had $1343. Would this affect her filing by any chance? Say if her taxable income exceeded $1100, where should the income (other than 1099-INT) be shown on her return? Thanks in advance for your assistance.

[Hal_Al · Accepted solution]

Q. Would this (Box 5 Scholarship  had $1343)  affect her filing by any chance? Say if her taxable income exceeded $1100, where should the income (other than 1099-INT) be shown on her return? 

A.  No.  Taxable scholarship is subject to the $12,200 limit, not the $1100 limit (see above).  Also, an amount in box 5, of form 1098-T, is not automatically taxable.  It is only taxable if not used for qualified expenses (tuition, fees & books).

[ram01]

Thank you for your earlier response. Truly appreciate it. Had one more question just for future reference. Say, if the earnings (box 2) on 1099-Q and unearned income exceed $1100,  how to report the earnings mentioned in 1099-Q when filing? Is there a specific section where-in we can enter that amount ?  Thanks again in advance for your assistance.

[Hal_Al · Accepted solution]

Q. if the taxable portion of the earnings (box 2) on 1099-Q and unearned income exceed $1100,  how to report the earnings mentioned in 1099-Q when filing? Is there a specific section where-in we can enter that amount? 

A. Yes,  you would have to file if that amount exceeded $1100. See example above for how the taxable portion of box 2 is calculated.  In TurboTax (TT), there are two places to enter it.  The usual way is at the 1099-Q screen, in the education interview.  You can also get the 1099-Q screen at  Less Common Income -Misc Income, 1099-A, 1099-C. Either way, you enter the 1099-Q and the educational expenses and let TT calculate the taxable portion. 

You would have to use a workaround to just enter the taxable amount.