This is long, bear with me. I thought a scenario would help.
Scenario below. Note that I know I don’t owe any taxes as I’ve taken out less distributions than overall expenses (we didn’t reimburse ourselves or our daughter for some food, etc. But I can’t figure out how to make this work on our returns.
Question/Issue: If I don’t state she has at least $15K in expenses on her return, then some portion of her 1099-Q earnings would be taxable. So I know I need to claim all net tuition less scholarships and dorm expenses on her form. But then, there is nothing left to claim except the remaining living expense on my return to offset by $5K 1099-Q. I can’t double dip, so the only thing that lets me get past the screen in TurboTax is to lie and say the University won’t provide me a 1098-T?? I have one from them, I just can’t claim the expenses as they have to go on her return.
Help??
(Caveat, we actually already filed our daughter’s return. We put the 1099-Q there along with the tuition and expenses to cover, and no 1098-T The issue I’m having now is what to do on my return…I didn’t know TT would send me in a loop.)
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Q. I need to delete the entire form (1098-T)? And I think I'm going to delete the 1099-Q on mine as well.
A. Yes, since you're not eligible for the credit and you know none of the 529 distribution is taxable, you have nothing to claim/report, on your tax return.
The 1098-T and 1099-Q are only informational documents. The numbers are not required to be reported on your or the student's tax returns.
Counting the dorm fee and rent, you have plenty of expenses to cover both 1099-Qs. There are two ways to enter on your return. 1. When asked about a 1098-T, say you qualify for an exception that will get you to the screen to enter room & board. To get the screen to enter Room & Board, answer yes when asked if you have book expenses. You must enter the 1099-Q, before entering the educational expenses section. 2. Don't enter the 1099-Q or delete it if you already have.
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!
References:
You say you likely don't qualify for an educational credit. That is true if you income is too high (>$180K). But paying expenses with 529 money does not disqualify you. At tax time, you are allowed to allocate expenses as needed. You are not bound by the actual payment method. You can easily claim the full credit and not pay any additional tax on the re-allocation.
______________________________________________________________________________________________
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 American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). 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 regardless of whose money was used to pay 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 which is only qualified for the 1099-Q)
-$3000 paid by tax free scholarship***
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q (on the recipient’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
There is $1120 of taxable income (on the recipient’s return)
**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. A student, with no other income, can have up to $13,850 of taxable scholarship (in 2023) and still pay no income tax.
Thank you so much! I'll take another look at TT tomorrow night. I didn't realize that (1) it was an option to not report your 1099-Qs at all. (Does that mean neither of us would report them at all?? And is it an issue if we already reported and filed the $15K 1099-Q on our daughters...would we just Ignore it on ours as well as all expenses? If so, making a note for next year!) On the 1098-T (that's the one that is tripping me), I can't remember the actual wording but I thought I said exception and that the university hadn't provided it, which wasn't true. I'm just not sure why there isn't a way to "match" the 1098-T expenses on the same return as the 1099-Q withdrawal for funds that go directly to the school but are in the child's name, but that are supposed to go on the parents return.
And yes, we are not eligible due to income, blessed to have that problem. Our older daughter was also blessed to have scholarships exceed tuition and living expenses, so we are used to her paying taxes on scholarships AND 529 withdrawals. So I know I don't owe taxes with this kiddo, the reporting just has me perplexed for a "normal" student.
Q. Does that mean neither of us would report them at all??
A. Yes, as long as there are enough expenses, including room & board.
Q. Is it an issue if we already reported and filed the $15K 1099-Q on our daughters...would we just Ignore it on ours as well as all expenses?
A. It's not an issue, for two reasons. 1. There are enough expenses for both distributions. 2. Nothing was really reported to the IRS. 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.
Q. I'm just not sure why there isn't a way to "match" the 1098-T expenses on the same return as the 1099-Q withdrawal for funds?
A. There is. The 1098-T is only an informational document. You may enter it on both, if necessary, making the necessary adjustments.
Q. 1099-Q withdrawal for funds that go directly to the school but are in the child's name. Is it supposed to go on the parents return?
A. No. The student is the "recipient" in that case.
Q. The reporting just has me perplexed for a "normal" student.
A. Yes, it's a complicated issue and a common topic in this forum. Theoretically, TurboTax can handle it. But it's tricky. Short cuts can be used and the shortest cut of all is just don't enter it if you know it's not taxable.
Thanks so much. TT itself is not nearly as clear as what you have written. It doesn't tell me the 1099-Q is optional if I have covered expenses, nor is it telling me I can ignore the 1098-T. I think since I already put it in there with $0 in box 1 (which is not the case) that I need to delete the entire form? And I think I'm going to delete the 1099-Q on mine as well. Appreciate your time! 😁
Q. I need to delete the entire form (1098-T)? And I think I'm going to delete the 1099-Q on mine as well.
A. Yes, since you're not eligible for the credit and you know none of the 529 distribution is taxable, you have nothing to claim/report, on your tax return.
The 1098-T and 1099-Q are only informational documents. The numbers are not required to be reported on your or the student's tax returns.
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