1099-q with wrong recipient tin

[f15eagle]

I set up three Fidelity 529 plans for my three children (at the time each was born). When my oldest graduated college, there was money left in the account. My other two children are still in college and I used the remaining money for their qualified college expenses in addition to the separate 529 accounts I set up for them. The disbursements were always sent directly to the colleges. My oldest child now has a job and files a tax return this year, but is still a dependent on my taxes for 2022 (supported by me for most of the year). The problem I have is I just received three 1099-q forms and one has the first child's tin on it (the other two have it in their tins). This child no longer has any college expenses (no 1098-t) and the 1099-q for 2022 would now be on the oldest child's 1040. I thought Fidelity could send a corrected 1099-q, but they said because they did not make the mistake, it wasn't their problem to fix. I have more qualified expenses than all three distributions combined, but the 1099-q for the graduated child looks like it was an improper distribution subject to a 10% fee and income tax because it is on their 1040. I have clear invoices that show the disbursements from all three 529 accounts went to the two remaining colleges and covered only qualified expenses. I can't be the only person that has run into left over account money used for another child and wound up with this problem, but I can't find help on how to correct this. Can anyone help?

[Hal_Al]

"I used the remaining money  for their qualified college expenses".  You can't do that. You have to name a new beneficiary first, or roll the money over to the other child's account.

"My oldest child now has a job and files a tax return this year, but is still a dependent on my taxes for 2022 (supported by me for most of the year)."  Support, alone is unlikely to qualify her as your dependent, if she was not a full time student for parts of 5 months in 2022. 

Fidelity is right, the distribution from the first child's account is technically a non qualified distribution, subject to tax and penalty (on her return, because she is the recipient)

[f15eagle]

But the disbursement did go to the college. I own the account and sent it. I realize the mistake. Is there any way to correct it since in all reality it did not go to incorrect expenses.

[Hal_Al]

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board 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.

[f15eagle]

Thanks for the reply, I do appreciate the help.

The daughter for the 1099-q in question graduated May 2022. We had all her college expenses paid from 529 distributions in 2021 because that is when we were invoiced by her college and I don't let bills accumulate. She had no (almost none) expenses to claim in 2022. So we used her "left over" money in her account for her younger sister in 2022. We did not use any 529 distributions for the graduated daughter in 2022. Now, as we complete our taxes, the older, graduated daughter is prompted for the 1099-q (it is in her TIN), but she does not have her own college expenses any more. We mistakenly used the distribution on qualified expenses for her younger sister without transferring the money among accounts. Am I making too much out of this? Or is there some type of correction I need to obtain?

[Hal_Al · Accepted solution]

Q.  Is there some type of correction I need to obtain?

A. If you make a ,mistake, you have 60 days to put the money back to "undo" the non qualified distribution. 

Q.  Am I making too much out of this?

A.  No.  A mistake has been made and it is your mistake not Fidelity's. 

See these discussions on similar problems. The posts were about timing rather than wrong beneficiary, but the dilemma is the same: you meet spirit and intent of the rules (you used the money for your kids education) just not the technicalities.  

https://www.savingforcollege.com/article/timing-of-529-plan-distributions-must-match-qualified-expen...  

https://ttlc.intuit.com/community/college-education/discussion/529-provider-distributed-funds-on-12-...

https://ttlc.intuit.com/community/college-education/discussion/i-took-a-529-distribution-in-2021-for...

[f15eagle]

Thank you for your help.