1099Q distribution for my independent beneficiary that was used to pay her tuition but I am getting taxed on it

[jjrg7]

I have an independent adult child, that worked for several years but went back to graduate school.  She has been independent from my taxes for a couple years and had a full time job.  She decided to go back to graduate school.  I had some money left in a 529 in her name where I am the owner of the account and she was the beneficiary.   I took the distribution from the account and was sent the check.  I cashed this check and used all of this money to pay her graduate school tuition and I have the receipts from the school to show this.  However, the 1098-T went to my daughter as she is the student.   Now I am getting taxed on this 529 distribution when it all went to be used for tuition and should not be taxable.  How do I show the IRS on my taxes that this distribution went to a legitimately exempt tuition payment for my accounts beneficiary?

[KrisD15]

It would have been a good idea to have the student make the distribution so that the 1099-Q was issued in the name of the student. 

Regardless, at this point, if you are applying the independent student's expenses against the distribution, you only need to let the student know, so that the student subtracts that amount from any expense she might claim on her return. 

There is no real way to illustrate to the IRS on either return how you are handling the 1099-Q. 

All you can do is keep records and receipts with both tax files in case the IRS makes an inquiry. 

You needn't enter the 1099-Q into the TurboTax program (IF IT WAS USED FOR EDUATION PURPOSES) 

Or, you can enter the 1099-Q and answer that it was used for education expenses and that the education expenses were for someone not listed on your return. 

At that point the program will tell you that you do not need to report the 1099-Q. 

There are other options to how you and the student can apply distributions, scholarships, and expenses. For example a 1099-Q can go towards Room and Board in certain situations freeing up expenses that might be applied to a credit. 

IRS Pub 970 illustrates examples if you and your daughter want to consider rearranging allocations which might result in a better outcome for you both.    

[Hal_Al]

If TurboTax (TT) is saying it's taxable, you've made a mistake in entering info. It's best to just delete the 1099-Q.

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, and the beneficiary, would still have to do the math to see if there were enough expenses left over for her to claim the tuition credit. The two of you cannot double dip! 

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." 

That said, and you still want to enter it, it's actually easier, in TT, when the beneficiary is not your dependent. Instead of entering the educational expenses in the education expenses section, you enter it in the 1099-Q section of TT. When asked who is the student, check "someone not listed here". On the next screen, enter the  student's name.  This will eventually give you one simple screen to enter all expenses. That will get you the TT worksheet, for your file.  Nothing about the 1099-Q goes on the actual tax forms, when none of the 1099-Q is taxable. 

You should coordinate with your daughter on allocating the expenses.  It may actually be better for you to pay some tax, on some of the earnings, so that she can maximize the education credit, on her tax return.  The Lifetime Learning Credit (LLC) is worth 20% of tuition paid.  Compare that to your tax bracket rate. Grad students are not eligible for the more generous American Opportunity Credit (AOC or AOTC). 

[BDL3]

I still run into a problem with TT after entering 1099Q.  TT still wants information from the 1098T, and indicating that if no one is on the list is the dependent student that I cannot claim the education credit.   I do know that my independent son is taking the education credit on his own tax return, but TT seems to be stuck on this.  Should I just ignore this part of the software?

[Hal_Al]

Q.  Should I just ignore this part of the software?

A. No. It's telling you that you're doing it wrong.

You say" it's "indicating that if no one is on the list is the dependent student that I cannot claim the education credit"

That's correct you are not allowed to claim the education credit if the student is not your dependent. But, claiming the education credit and claiming the 529 plan earnings exclusion are two different things 

You go on to say: "I do know that my independent son is taking the education credit on his own tax return"

Two people (the parent and the student) cannot both claim the education credit on the same student

You can both enter the 1098-T. You, to calculate the taxable portion, if any, of the 520 earnings distribution and him to claim the credit. But, one of you must adjust the expenses you enter.

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 1099-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 on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• 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
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student?
• Is the student a degree candidate attending school half time or more?

[BDL3]

To clarify, my situation was very similar.  I paid education cost from 529 account where I am the recipient and in which I received a 1099Q.  My son (the beneficiary) who I cannot claim as a dependent because he earned more than 1/2 of his yearly living expenses received a 1098T for the same exact amount.  Note:  The amount for both are exactIy the same and used for his school tuition.  As the Parent, I entered only the 1099Q per the interview and referenced my son as the beneficiary.  I did not enter any information that's on the 1098T, nor did I fill out the that 1098T.  From your previous comment, I should be able to enter the 1099Q in my tax return and that TT won't do anything with it.   So, what am I doing wrong?  I am not sure how to enter the 1099Q without getting that error?  Should I just delete the 1099Q entirely and leave it at that?  But...if I do that, I am still uneasy that the IRS may see my return lacking in not accounting for the large withdrawal, and may take it as an unqualified education withdrawal.

[Hal_Al]

Q. Should I just delete the 1099Q entirely and leave it at that? 

A. Yes*(see below).

Q. But...if I do that, I am still uneasy that the IRS may see my return lacking in not accounting for the large withdrawal, and may take it as an unqualified education withdrawal.

A. If you enter it correctly, TurboTax will calculate $0 taxable income and nothing about the 1099-Q will be sent to the IRS. Your risk is the same either way. But, so far you haven't been able to get TT to do it correctly.

Q.   So, what am I doing wrong? 

A.   You did not enter any information that's on the 1098T or other expenses

Q. From your previous comment, I should be able to enter the 1099Q in my tax return and that TT won't do anything with it.

A. No. TT will treat it all as taxable until you enter the offsetting expenses. 

*That assumes you son has enough expenses left over to claim the tuition credit. That appears to be the case if the 1099-Q and 1098-T are the same, because you can use room and board (even if living off campus) as qualifying expenses for the 1099-Q. Books and computers are also qualifying expenses, 

[BDL3]

to specifically answer the information you need, are as follows:

1.  I am the Parent

2.  The student (my Son) is no longer my dependent since he earned more than 1/2 living expenses for 2022.

3.  Box 1 of 1098T -   15484

4.  Box 5 of 1098T -  Null ( no scholarships or grants)

5.  No other Scholarships

6.  Null

7.  Parents SS# on 1099Q. (Parent is recipient)

8.  R&B-  Was out of pocket and not accounted for in calls especially since it wasn't taken from 529 distributions.  (This was out of pocket, it cannot be accounted for in taxes.  I could be wrong on this)

9.  None

10.   52560 from earned income from work.

11.  From what I understand, I cannot claim the tuition credit since he is claiming independent.

12.  He is an undergrad.

13.  Attended full time.

[Hal_Al]

This  can be real simple.

Don't enter the 1099-Q, at all. It's fully covered by expenses. None of it is taxable. 

Surely a full time student has at least $4000 of room and board expenses (and/or the school's charge for on campus students is that much). So, you allocate $4000 of room & board to the 1099-Q.  That frees up $4000 of tuition for you son to claim the tuition credit of $2500).  

None of this allocation needs to be entered in TurboTax. He simply enters the 1098-T on his return. TT give him the credit, using only $4000 of tuition (not the whole $15484). You just keep this math on file if the IRS comes knocking (highly unlikely)