Can someone answer this 1099Q / 1098T question...it seems to be a common issue..that confuses all...PLESE HELP!!!

[confusedrf]

I do not recall how I go thru this last year and the software has not improved...it confusing.

Simple, common situation.  Daughter  in college.

Received 1098T. Box 1 Payments received for qualified expenses is $40K. Box 5 - Scholarships/grant is $22K. My daughter is listed on this form.

Received 1099Q . My daughter's name is in the recipients box. Nothing is checked in Box 8 - ...ie she IS the beneficiary.  Box 1 Gross Amount is: 11K. Box 2 Earnings is: 4K. Box 3 Basis is: 7K.

So, in general, we (her parents)  received a bill from the college of about $17k and paid it using her 529, a small federal loan and some cash. There was no excess dollars left over from the 529 withdrawal...it all went right to the school.

I think I understand I should enter the 1098T on MY tax return. Doing so seems to get me a $2500 credit.  I think I get another $500 since she is a dependent.

My daughter is also  filing a return for herself...she earned $4k on a summer job and most likely is due her $300 in fed taxes back....it indicates so until we enter the 1099Q on HER return.

So, where does the 1099Q go? On my return, her return or no return.

If I enter it on her return (and many posts say it must go on the recipients return) then suddenly it says she owes $450 in taxes instead of getting back $300. I figure that is because the 1098T is no where to be found to offset things,

If I enter it on MY return (I already entered the 1098T) it pops up a message that says something like $2K is taxable...BUT the amount it has calculated to that point for MY refund does not ever change. So who is responsible...what is TT trying to tell me.

If I do not report it all...well that does not seem right.

I am trying to dig out my return from last year to see how I handled it but to be honest I was confused then as I am now. I want to get this right..the last thing I need is an audit and owing back taxes when she graduates...and is looking to me to help with her masters degree since by then the 529 will be depleted!

[Hal_Al]

Here's the simple solution: don't enter the 1099-Q at all.  Like you said, it's too confusing. 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. It will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

Do enter the 1098-T on your return so that you can claim the tuition credit. You have sufficient expenses to qualify, even after factoring in the 1099-Q.  

Q."Doing so seems to get me a $2500 credit.  I think I get another $500 since she is a dependent"?

A. That is correct!!

Q. "If I do not report it all...well that does not seem right". 

A. Whether you enter it in TT, or not, it does not get "reported" to the IRS because the taxable amount is 0.  

**The math: 40K expenses minus 22K scholarship = 18K.  18K minus 11K paid by 529 plan = $7K eligible for Tuition credit (it's actually much more since 529 money can be used for room & board). But it only takes $4K of expenses to get the maximum $2500 credit

______________________________________________________________________________

Info only (if you insist on entering it);

 Problem: "suddenly it says she owes $450 in taxes instead of getting back $300. I figure that is because the 1098T is no where to be found to offset things".  

You have to enter the 1098-T  on both returns. To claim the credit on your return and to enter offsetting expenses on hers. You have to adjust her expenses for the $4K you claimed (it's all in TT, just complicated)

Problem: If I enter it on MY return (I already entered the 1098T) it pops up a message that says something like $2K is taxable...BUT the amount it has calculated to that point for MY refund does not ever change. So who is responsible...what is TT trying to tell me

You've simply made a mistake (it's complicated). See the math above, nothing is taxable. 

[confusedrf]

WOW...you cleared up a bunch of stuff for me. It sounds like I just enter the 1098T on MY return and file the 1099Q away.

However...I never understood HOW I got the $2500 awarded to begin with...if you need not enter the 1099Q I assume it just looks at the difference between the total expenses on the 1098T and the scholarships/grants...but I suspect its not that simple!!!

It sounds like to get the $2500 you must have 'expenses' greater then '4K'  if I understood you.  I am getting worried again.  I guess my question is what are my expenses?  My 1098T shows $40K tuition/expenses. It shows 22K scholarships/grants.  That leaves what I would consider 18K balance expenses for the year and  that's a lot more than $4K! .  But I am guessing that not what the gov considers expenses...

That 18K balance was paid by:

1099Q:

Box 1 -$11K payment to the college

Box 2 - 4K of the 11K was 'earnings' which I assume to be interest earned (tax free) over time

Box 3 - 7K of the 11K was 'basis' which I assume to mean money my wife and I put into the 529

Then we have:

6K in Federal Loans Accepted by my ''daughter

And finally around:

1K Cash for books and stuff we paid out of our savings account

So the big question is: based on the above, should I be getting the $2500????? TT seems to think so whether I enter the 1099Q or not.

SO, what exactly counts towards that 4K magic number you mentioned?  The 1K from my savings? The  $6K loan my daughter accepted?  The entire 11K payment made from the 529 to the college? Only the $7K Basis from the 529 payment?

I do not know how TT determines all this or if its something I must determine for myself. 

So, Hal_AL….you cleared one thing up for me and I appreciate that more than you can imagine...can I go to the well again and ask you or anyone else for help on the second matter?

[Hal_Al]

You're making it unnecessarily  complicated. Your math is very simple. You get the full $2500 credit. None of her scholarships or 529 distribution are  taxable** or reportable. .

40K expenses minus 22K scholarship = 18K.  18K minus 11K paid by 529 plan = $7K eligible for Tuition credit. So, yes, the 1K from savings and the  $6K loan  counts towards that 4K magic number.  Even though the loan was your daughter's, you get to count it on your return, because she is your dependent

Qualified expenses for the tuition credit include tuition, fees, and course materials (books and computers). Qualified expenses for a 529 plan include tuition, fees, course materials plus room and board.  The $40K, in box 1 of the 1098-T, does not include room and board. 

So yes, again, you should be  getting the $2500!!!!!!

** Many taxpayers (or their student dependent) have to pay tax on scholarships or 529 distributions, in order to claim the very generous  American Opportunity tax credit (AOTC) (up to $2500).  On the other hand, there are "taxpayers" who claim it without paying anything (even though the student must report taxable scholarship, it doesn't actually get taxed until the student has over $12,200 of income).

[confusedrf]

Sorry for complicating things!!!! To a lay person, this is complicated to understand. Sure, it seems TT gets to the right answer but I'd like to have a general idea of whats going on..and thank you assisting!! If its any consolation, a work buddy saw this post...he did not  know it was me!!!  It helped him too...in fact he mentioned it to me on break yesterday.

So let me ask one or two more basic questions.

I have a situation where my SON decided no to continue school.  He says he is NOT going back. My first thought  was...maybe he will change his mind.  I'll have my daughter keep taking the $6k or so gov loans  and if he does not go back use his  529 $$$ to pay off my daughters loans when she graduates in 2.5 years.  WRONG!!! I found out there would be all sorts of penalties and interest---Only $10K from the 529 can be used to pay off loans..after that you suffer penalties and interest.

So, since he so adamant  I am now thinking I should have her decline these loans, transfer the 529 $ from my son's account to hers and use the 529 to pay the entire balance.

I expect the numbers to end up like this next year:

Form 1098 T Box 1 = $41K, Scholarships/Grants = $22K.  

Form 1099Q Box 1 = $19K,

Form 1099 Box 2 = Earnings -  I'll guess Box 2 would be in the neighborhood of $7K

Form 1099Q Box 3 =Basis --I guess it might be $12K

1) Do we get the $2500 credit?

2) You keep mentioning Room and Board but she is a commuter living at home...not sure how that impacts the $2500 credit.

3) Does the 1099Q Basis / Earning in any way factor into the $2500 credit.

I think after this I can leave you alone...but seriously thanks for sharing your knowledge. I just am trying to be legal and fair and take advantage of what I am allowed to.

[Hal_Al]

Q1).  Do we get the $2500 credit?

A1).  No. But, yes.

41K -22k =19K which is fully covered by the 19K  529 plan distribution. It appears that there are no expenses left for the tuition credit.  But the tuition credit is so generous ($2500 for $4000 of expenses or $2000 for $2000 of expenses) that you are better off paying some tax on the 529 distribution. 

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:
  $41,000 in educational expenses(not including room & board, more on that later)

   -$22,000 paid by tax free scholarship

   -$4000 used to claim the American Opportunity credit

 =$15,000 Can be used against the 1099-Q 

Box 1 of the 1099-Q is $19,000

Box 2 is $7000

15,000/19,000 = 79% of the earnings are tax free

79% x 7000 = $5526

You have $1474 of taxable income (7000 -5526)

$1474 x 12% tax rate = $177 in tax or 1474 x 22% =  $324.  Compare that to $2500

The 10% penalty for a non qualified distribution is waived because the $ difference was used to claim a tuition credit and/or was covered by scholarship. 

The other obvious option is just take out $4000 less from the 529 plan. Then nothing is taxable, for now.

Q 2) .You keep mentioning Room and Board but she is a commuter living at home...not sure how that impacts the $2500 credit.

A 2), Room and board counts for a 529 plan distribution.  You can count your actual cost to live at home or the amount the school charges an on-campus resident; whichever is less.  The board part is fairly easy. I've seen some posters recommend you charge her rent to solidify the room part.  In your case board alone is probably enough to use up $4000.

Q 3). Does the 1099Q Basis / Earning in any way factor into the $2500 credit?

A 3). See Q/A 1

I agree, you should transfer his 529 plan to a plan for her.  If he goes back to school, you can transfer it again, back to him (must be more than 12 months after the 1st transfer)

[confusedrf]

Jeez...just when I thought it was getting less complicated!  I'll need to absorb all this.

The basis portion of the 529 was cash we took out if savings and out into the 529 to grow......why doesn't that count toward the $4k!

So if I just charge her room and board of $4k each year...I need not worry about anything else....but how must that be documented...what records kept...where is it entered into TT...plus she makes less than 5k over the summer so doesn't that look fishy...or is this money she would 'owe' us over time.

One thing my wife mentioned...she says she gives my daughter money for gas to get back and forth and money for food...over  two 15 week semesters the gas is  probably $800 and food could be close to 3k.....that's almost 4k right there...would this count towards the 4k ??? a if so I assume I should track it for our records...does it get entered into TT.

I have been buying her books and software out of pocket...not really putting them into TT too. That's another $500 or so a year....

[Hal_Al]

You're getting bogged down in irrelevant details.

The basis portion of the 529 was after tax money and is already include in the gross distribution (box 1).  You can't double count it.

You don't really need to charge her anything. You are putting out cash to buy her food. That's good enough. You don't need receipts; the IRS *always* accepts the school's board numbers.  I'm sorry I mentioned the "charging" concept.  I don't think it's needed. Others have suggested charging rent (but not board) would be a CYA technique.

Transportation (gas) is not a qualified educational expense.

Out of pocket books and software  are qualified expenses

[confusedrf]

Thank you so much.  I think I am ok and understand.  

One final one...Must I show room and board, or food as you mentioned etc somewhere in TT or just enter the 1098T each year and file away the 1099Q.  I appreciate your time. I know others who follow this link will benefit.

[Hal_Al]

Just enter the 1098-T each year and file away the 1099-Q. 

[Funkhowser]

Have a similar situation. Junior year.  TT is giving me some fits. I deleted all and will start over.  This year my Q form gross payments will equal the difference between the the T form Tuition total and scholarships; ie we did not have any loans this year nor did we use any cash towards tuition this year. The 529 pais almost everything.

So to qualify for AOC we must show 4K in additional expenses...right? I paid for books, book rentals, lab attire to the tune of $650.  Our son commutes about 10 miles each way from home to school. We pay for gas and food, starbucks (ugh!)  We paid out of pocket for a summer course he took at a local community college and transfered over. ($450) I figure between the books, that course and the food, that  should reasonably put us over the 4K....and get us the AOC. FYI we have book receipts and a receipt for the course...not he food.

It sounds like we should get the $2500 but TT does not seem to think so.  Maybe I did something out of order.  I'd think I'd entered the T info then the Q info and it did not say I was getting $2500.  Where the heck would I enter the additional expenses (food, books, lab attire, course etc.)  I have no idea where that goes. OR...do we just enter the T info, skip the Q, hopefuly TT then deems us able to get  the $2500 and do we just keep some sort of paper record in our files outlining the expenses that were just aboive 4K.

[Hal_Al]

@Funkhowser  Yes, you qualify for the $2500 AOTC.  For a 529 plan distribution, room and board are qualified expenses,  even if the child lives at home. Use your actual expenses or the school's R&B charges to on campus residents, which ever is less. You don't need receipts.

 Books, book rentals, lab attire and the summer course are also qualified expenses for both 529 and the tuition credit..  Commuting cost is not, nor is the parking fee.

Yes the interview goes smoother if you enter the 1099-Q first, then the 1098-T.  Better yet, don't enter 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 do). 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.

[confusedrf]

I find it interesting that TT does not require the 1099q data to be entered but allows you to 'make the call'.  One would think the gov would want proof of attaining the 4k after applying 529 $....

In Funk case he does not enter the 1099q and gets the credit but must have some sort of supporting doc in his files in case it's ever called into question I guess.  I would have thought the gov would have preferred that info be present on the tax filing.

[Funkhowser]

There is irs document 970p...the shear size of it demonstrates why their is  confusion abound.

I saw this in there :

Expenses That Don't Qualify

Qualified education expenses don't include amounts paid for:

• Insurance;

• Medical expenses (including student health fees);

• Room and board;

• Transportation; or

• Similar personal, living, or family expenses.

I am now not so sure that if your 529 dispersement + scholarships/grants = tuition that you can consider a commuting students food, room and board etc to be qualified towards the $4k required to get the $2500.

I think I need an accountant.  Perhaps this all to complex for TT to correctly report.

I welcome thoughts....

[Hal_Al]

IRS Publication 970, Tax Benefits for Education

What you read is the section(s)- chapters on tuition credits and deductions. Room & Board are not qualified expenses for those.

See Chapter 8. Qualified Tuition Program (QTP)  https://www.irs.gov/pub/irs-pdf/p970.pdf

Qualified Higher Education Expenses  (for a QTP / 529 Plan)
"These are expenses related to enrollment or attendance
at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time, defined later.
1. The following expenses must be required for enrollment or attendance of a designated beneficiary at an
eligible postsecondary school.
a. Tuition and fees.
b. Books, supplies, and equipment.
2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.
3. Expenses for room and board must be incurred by
students who are enrolled at least half-time (defined
below).
The expense for room and board qualifies only to
the extent that it isn't more than the greater of the following two amounts.
a. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b. The actual amount charged if the student is residing in housing owned or operated by the school.

You may need to contact the eligible educational institution for qualified room and board costs.
4. The purchase of computer or peripheral equipment, computer software, or Internet access and relatedservices if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't include expenses for computer software for sports,
games, or hobbies unless the software is predominantly educational in nature.)
5. For distributions made from QTPs after 2018, expenses for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.
6. For distributions made from QTPs after 2018, no
more than $10,000 paid as principal or interest on
qualified student loans .........."