Should I enter the 1098-T information if a Coverdell ESA was used to pay the tuition of my dependent?

[Hal_Al]

There is a box on the 1099-Q:

"If the fair market value (FMV) is shown below, see Pub. 970,
Tax Benefits for Education, for how to figure earnings" (page 53)

Was there anything in that?

Your original basis was $2000.  You have to calculate how much of that $2000 was included in the current $4998.50 distribution. You do that by noting how much was still in the account on 12-31-20.

[jmontesrn]

The fair market value has the total amount which is about 24,000.  So per the worksheet 7-3, p. 58 I added the distribution (about 5,000) plus the fair market value which gave me line 8 (total of 29,000).  Then I divided the original basis of 2,000 (since no contributions have been made) by that total of 29,000.  I used this number and multiplied it by the distribution (5,000) to determine the amount of basis allocated to to the distribution which is tax free.  Does that sound correct?

Thanks!

[Hal_Al]

Yes, that is correct.  That sounds like the basis portion of the $5000  ($4998.50)  is about $345, making the earnings about $4655. 

Have you been able to come with the school's meal plan charge, so that we can use some of the ESA for "board"? 

Since we now know  the ESA distribution did have earnings (actually almost all earnings) it's not tax free,  unless we come up with some more expenses to allocate to it. 

Here's where we're headed (I think): 

1. You will use $4000 of the expenses to claim the AOTC

2. You student will declare the $1740 scholarship to be reportable income, freeing up more expenses for the ESA distribution.  The $1740 will not actually be taxed unless your student has more than $10,000 other income to report.

3. We need to determine the taxable portion of the ESA.  If "board" is more than about $2350, none of the ESA distribution will be taxable. 

[jmontesrn]

Hi...think I understand.  The estimated cost for board for a  full time student is "2,300" per his college's website.  So I would need to remove the scholarship from my tax information and add the board to the QEE, and then file his scholarship money as income on his tax return?   The total of qualified educational expenses would be higher  (roughly 8,600)  and the Coverdell could count toward this with less being taxed, or almost none with the board cost included?  That is such a creative solution-wow!  Is that correct?

Thanks!

[Hal_Al]

Yes, that is fundamentally correct. TurboTax is capable of handling it all, but the interview is complicated. I recommend using some short cuts.

1. You will use $4000 of the expenses to claim the AOTC.

The simplest thing is to modified the 1098-T. I would enter $4000 in box 1 and leave box 5 blank. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. Don't enter any other numbers.

2. You student will declare the $1740 scholarship to be reportable income, freeing up more expenses for the ESA distribution.

Does your student have any other income? That is, if it wasn't for having to report the scholarship and 1099-Q, would he even have to file a tax return? The shortest short cut is for him to not file a tax return, at all. We don't know exactly how much of the 1099-Q will be taxable, but I'm pretty sure it will be under the $350 filing requirement (assuming we use the $2300 board allowance). That said, some people recommend you file anyway, to document the fact that he is counting the scholarship as income (allowing you to claim the AOTC).
3. We need to determine the taxable portion of the ESA.

You have $6354 tuition + $300 books + $2300 board = $8954 Total expenses less $4000 used for the AOTC = $4954. That is only $45 less than the $4999 ESA distribution. Using your basis fraction, that works out to $42 taxable. I think that's small enough to ignore, since it won't actually get taxed (his standard deduction covers it).

If you do deicide to have your student file and need instructions on a short cut entry method, let me know.

[jmontesrn]

Thanks, I did change the 1098 within Turbo Tax, and removed the scholarship.

No, he would not have filed without this change.  He will probably file for this year to claim the scholarship as recommended, if you do not mind I would appreciate instructions on the shortcut entry. 

I am also adding to his educational expenses the purchase of a laptop for $650 that he needed for college classes (8954+650=9604).  Now the total will be well above the distribution so none should be taxable.  

Thank you!

Jen

[Hal_Al]

You are correct, the purchase of a lap top is an eligible expense for an ESA distribution. 

Confirming your calculation: You have $6354 tuition + $300 books + $2300 board + $650 computer = $9604 Total expenses less $4000 used for the AOTC = $5604.  5604 - $4999 ESA = $605 can be claimed for the scholarship.  So, the taxable amount of the scholarship is now 1740 - 605 = $1135.

Short cut: Do not enter the 1099-Q at all.  The ESA distribution is totally covered by expenses*. At the 1098-T screen, on the student's return.  enter $1740 in box 5 and $605 in box 1. (Alternate: put 1135 in box 5 and 0 in box 1). Enter no other numbers.  TurboTax will put $1135 on line 1 of form 1040 with the notation SCH.  The student-dependent's standard deduction will be 1135 + 350 = 1485. So, there will be no tax.  In the personal info section, be sure you indicate the student can and will be claimed as a dependent.

Be sure to keep a record of these calculations in case of an IRS inquiry.

*Even if you entered all the ESA data, 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. 

[jmontesrn]

OK, thank you so much for all of information.  It was incredibly helpful. 

Thanks,

Jen

[MJJS02]

I have a similar question.  I followed how to handle parent/dependent student breakouts (which you clarified on another thread before I found this one).  But I have an additional question regarding the 1099-Q.  

Some background: Snail mail messed up our plans.  College bill was due early January, so we requested the ESA money in mid-December, but it didn't arrive in time to pay the college in December.  We did the rollover (indirect back into the same account) in the 60 day period to avoid getting hit with taxes/penalties, fearing we would not have nearly enough expenses to cover what was 'distributed' in 2020 vs. costs actually PAID in 2020.  The Basis and Earnings boxes were blank, so I followed the process outlined in this thread. ... except I did it using #'s where the rollover is accounted for, rather than what is actually on the 1099Q.  Fear explaining poorly.

Dist 1: $3830

Dist 2: $3287  (Dec 2020) 

Dist 2 was fully re-invested by indirect rollover within 60 days

1099Q as received shows:

Gross Dist: $7117

Earnings: blank

Basis: blank

FMV: $8037

So in the 1099Q info request in TT I put:

Gross Dist: $7177

Earnings: $2384

Basis: $1445

and wherever it asks about FMV: $11,324

But I figured Earnings, Basis, and FMV based on the rollover being done.  Is that right?  Of do I figure Earnings and Basis and enter FMV based on what is actually on the form since the rollover is asked about in follow up questions?

Thanks!

[MountainGal]

@Hal_Al Based on the discussion here, I am inclined not to include my daughter's 1099-Q from her Coverdell distribution in Turbotax. Can I put the numbers in this thread? Or should I start a new question? Thanks.

[Hal_Al]

@MountainGal  Yes, ask a new question. This thread is too long with too many many sub topics.  State your question and provide these details::

• Are you the student or parent.
• If, student, are you the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Box 1 of the 1099-Q
• Box 2 of the 1098-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If you live off campus, what is school's R&B charge
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers