Q1. Is my son required to file taxes, since he received a 1099-Q on his name?
A1. No. Not just for receiving a 1099-Q. If any of it is taxable, he needs to file (none will be, explained later)
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."
Q2. I can input the 1098-T in MY (parent) tax return and claim the AOTC credit. Did I get it right?
A2. Yes. You can do so because he is your dependent. You must adjust the expenses used for the 1099-Q by any used for the AOTC. You still have enough, see below.
Q3. In TurboTax, under section "Deduction & Credits / Education / Form 1098-T", I guess, I should enter $7802? Right under Box 1, should I also click the link "What if this is not what was paid to this school" and enter $13675.76? Or this is not needed?
A3. Enter the 1098-T exactly as received. Don't bother to enter any other amounts (they're not needed). Any adjustment will occur on the student's return, since the 1099-Q is in his name (no adjustments will be needed, based on your numbers)
Q4. In TurboTax, under section "Deduction & Credits / Education / Form 1099-Q", should I answer "Yes" to question "Did you receive Form 1099-Q for distribution from a Coverdall ESA or qualified tuition plan" and enter the 1099-Q info? Or answer no, and do not enter the 1099-Q info at all?
A4. Answer no, and do not enter the 1099-Q info at all. It's not in your name and it's not needed.
You have $13,676 total qualified expenses. You will use $4000 (on your return) for the AOTC. That leaves $9676 to be used against the 1099-Q. That is more than the $9647 in box 1, so your son does not need to report the 1099-Q or file a tax return. Good Planning!
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!
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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 $2800
3000/5000=60% of the earnings are tax free; 40% are taxable
40% x 2800= $1120
You have $1120 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.
