Do I need to report 1099Q information if distributions from 529 were less than qualified expenses?

[phillipsrp1]

My wife is getting her Graduate's Degree and I formed a 529 for her.  In 2017, the 1099-Q is the exact same amount as the 1098-T.  There are also additional books and qualified expenses driving the total student qualifying expenses far over the 1099-Q disbursement.   Can I not report the 1099-Q , and still get the lifetime learning credit?

[phillipsrp1]

great

[JaimeG · Accepted solution]

If the Distribution doesn’t exceed the amount of the student's qualifying expenses, then the distribution is not Taxable and you don't have to report any of the distribution on your tax return. I understand that this sounds strange, especially regarding taxes, but the IRS does not request any additional information to substantiate whether or not your Distribution exceeded your actual qualified expenses. Nevertheless it would be wise to keep a good record of these expenses just in case your return gets picked up for examination.

If the Distribution exceeds these expenses, then you must report the earnings on the excess as "other income" on your tax return. Additionally When a student’s school expenses are paid with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense.

One other issue that can come up with Coverdell and 529 Plans is when the Account Owner instead of the Beneficiary receives the 1099-Q. If the box on the 1099-Q that states "Check if the recipient is not designated beneficiary" is checked sometimes the IRS' computers calculate a deficiency and automatically assess penalties and interest. This is easily solved with proper communication of the situation with the IRS but nevertheless it does take time. The best way to avoid this situation is to have the distribution paid directly to the school or to the Beneficiary. This will create a 1099-Q in the name of the beneficiary instead of the account owner and keep the super-duper computers at the IRS at bay.

[CT02]

Very informative,    How does one "proper communication of the situation with the IRS.. "   The situation was/is  I received 1099-Q  that went to  daughter's  room and board.   I have the cancelled checks, but How do I communicate that to IRS?

[sales8]

I spoke with a turbotax  lawer by phone and he advised that there is NO need to file this if the distribution does not exceed the expense. he said " just leave it off". I checked around and he appears to be correct.

[chris20]

This is very helpful. However I do have a question - if the qualified expenses exceed 529 distributions, then completely leave off the 1099-Q and qualified expenses (1098-T etc)?

[toolmantom2]

It does not seem to make sense either, since communication will be after they issue some notice.  I wish I had realized that in 2016

[jacquedodds]

Box 6 is checked on my 1099Q - husband is named recipient not my son the beneficiary. Expenses do exceed the 529. What exactly does it mean to "just leave it off"? Do I delete what I have list for the 1099Q form in turbo tax?

[brcranes]

Currently, when I enter 1099-Q distributions that are LESS than the qualified expenses from a 1098-T, TurboTax still increases the tax owed.  The solution of not reporting the 1099-Q and explaining to the IRS after the fact is poor advice, especially when elsewhere in your Q&A you mention you are required to report it, see question "1099-Q form. Do I need to report it?"  Why doesn't TurboTax just calculate this correctly?

[raywmlee]

I have a situation nobody seems to ever discussed.  After entering all the numbers correct for plan 529 1099-Q and college 1098-T, turbo worksheet concludes there is no taxable amount for the 10% penalty but there is taxable amount for the regular tax part.  I cannot find any IRS publication on how that can happen and there is no clue reading the Turbo tax worksheet.

[saf93]

Thanks for this clarification.  I have been there (last year), and it's not as bad as I anticipated. 

My wife and I are long-term Turbotax users and have put 3 children through college using 529 plans.  In 2018, my wife received two 1099-Q distributions that were for qualified tuition payments for two of our children.  When I filed our joint 1040 form in March 2019, we did not report the distributions, as recommended by Turbotax.   

Five months later, in September, I received a notification from Turbotax about a notice from the IRS.  It was a bill (CP2000 Notice) for extra taxes on the 1099-Q  earnings (those reported in box 2).  The letter provided some contact information, but only vague instructions on how to respond if I disagreed with the extra tax assessment.   I spent a few hours collecting documentation showing that the distributions were offset by even larger tuition payments that we had made for our childrens' education (and reported to the IRS in 1098-Ts issued to our children).  I then phoned the IRS help-line and got a very helpful agent after a modest wait (less than 20 minutes).  After listening to my story, the agent reassured me that I probably did not owe extra taxes and instructed me to write an affidavit simply stating why I disagreed with the proposed additional taxes, and mail it to his attention at the IRS Service Center (this was because he happened to be at our regional IRS service center). 

Less than a month later, we received notification that the CP2000 notice was resolved and that our tax bill had been returned to that in our original filing.

[chop]

tax act does not calculate it correctly either

[KrisD15]

The choice is up to the Taxpayer, 

apply expenses to a credit or to the distribution, or partially to both. 

IRS Pub 970

[Carl]

While all of the responses in this thread are correct, none of the responses are all-inclusive so as to provide a clear and concise answer, thus removing the ambiguity.

 - If the total of all tax free/exempt education assistance from all sources combined exceeds the qualified education expenses, then you "MUST" report it "ALL" on your tax return.  Period.

This includes (but is not limited to) scholarships, grants, 529/Coverdell distributions, Pell Grants, Employer provided education assistance, and anything else provided to fund the "qualified" education expenses of the student.

Example:
Sally has qualified tuition expenses of $5000

Sally got a scholarship for $3000 and a 529 distribution for $3000.

While the 529 distribution does not exceed her qualified expenses, the total of all education assistance received from all sources *DOES* exceed her qualified expenses.

Now you would think (and you would be correct in your thinking) that since you used the 529 funds for room & board while sally was in school, you don't need to report it since it's tax free anyway. The fact is, you'd be right. But the IRS doesn't think t hat way, and their computers most definitely don't think that way.

When you claim the $2000 out of pocket expenses, the IRS is going to "know" you got that $3000 529 distribution because they have a copy of the 1099-Q that was sent to you. That's going to generate a computer generated letter to you from the IRS (basically, a nasty gram) denying you your $2000 out of pocket expense deduction, because of the 529 you did not report.

However, if you report that $3000 529 distribution on your tax return and indicate that the entire distribution was used to pay Sally's rent for the  period of time she was in school, you'll still be able to claim (and will get) your $2000 out of pocket expense deduction. That makes the entire 529 distribution tax free since it was all used for the unqualified but "allowed" expense of room and board, since that room and board was "in direct support" of Sally's education.

This will negate you getting a nasty gram (which will delay your refund for weeks, if not months) from the IRS, inquiring about what you did with the 529 funds.

SO when it doubt, report it.