Entering 1099-Q in turbotax

[Hal_Al]

What you're saying is: you took a distribution in 2020 but didn't spent the money until 2021.

Technically, that's not allowed.  A distribution must be taken in the same year as the money is spent. 

You meet the spirit of the rules, spending the money on qualified expenses.  This happens a lot.  Some people take the attitude, I'll claim it and hope the IRS accepts my explanation, if audited. 

Next year, you need to do better planning, so you meet the rules. 

[trishd55]

I agree that there is something wrong with the 1099-Q interaction with the education expenses and that is further impacted by qualifying for the education credit or not (in my case I am referring to the American Opportunity Credit).  I am right on the line of that credit which is affected by how much we contribute to our traditional IRA.  I'm not a tax expert (did alot of googling) but just answering the questions that Turbo Tax asks causes me to owe more taxes than I think is required.  Also, Turbo tax doesn't seem to let you modify the 1099-Q, box 2 (taxable earnings), information without changing boxes 1&3.  

Also, putting in the 1099-Q or leaving it out does affect the state taxes.  

Perhaps Turbo Tax needs to look into this further.

[Hal_Al]

@trishd55 said "putting in the 1099-Q or leaving it out does affect the state taxes".

Which state and how does it affect it?

Some states require an adjustment when you take a non-qualified distribution.  But, you would only not enter the 1099-Q if you had a fully qualified distribution. 

[trishd55]

New Jersey.  It includes the 529 as income when the 1099-Q is included in the federal information.

My 529 distribution is qualified (unless the education credit applies which is affected by my traditional IRA contribution putting me over or under the income limit for that credit).  I don't want to 'double dip'.

I ran 6 different scenarios; with various different combinations of 1099-Q (included or not), Traditional IRA (max contribution or not); adjusting the taxable earnings on the 1099-Q when the education credit applied and then partial IRA contributions just under the limit to qualify for the education credit.

Turbo Tax does not change the taxable earnings on the 1099-Q for the scenarios in which it is input exactly.  I tried to apply the $2,500 education credit to the taxable earnings but box 1&3 needed to change and I don't want that to be a red flag with the IRS.  So I messed around with my IRA contributions to try to get to the income limit to a point where the answer is close to what I think it should be.    

It seems that Turbo Tax should have been able to adjust that box 2 information accordingly knowing the education expenses that I had and whether I was eligible for the education credit?

[Doukastaxes]

Will do and know I will be speaking with the advisor who suggested and facilitated the withdrawal.

Soooo... if one was to intend to act in good faith, keep detailed record and ensure that it would all be reconciled in reporting 2022 distribution and expenses, what would be the best approach? Over reporting by including Spring 2021 expenses or under reporting what is listed on the 1099-Q?

[trishd55]

To clarify this statement of my previous post:  So I messed around with my IRA contributions to try to get to the income limit to a point where the answer is close to what I think it should be.    Clarification: I utilized a partial traditional IRA deduction to get to the point where I am just over the income threshold to claim the education credit.  That way I don't have to worry about the education credit causing the some of my 529 earnings to be unqualified.  Then I don't need to input the 1099-Q numbers which Turbo Tax is calculating as fully taxable.  Ideally, I could take my full IRA deduction and Turbo Tax would have some way of allowing for the adjustment of the taxable earnings in Box 2 of the 1099-Q.  

[Hal_Al]

 @Doukastaxes 

Over reporting by including Spring 2021 expenses. 

Or better yet, just don't enter the 1099-Q, at all. 

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. 

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." 

[Hal_Al]

@trishd55 

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 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
• How much taxable income does the student have, from what sources
• Your AGI after IRA deduction

[trishd55]

• Are you the student or parent. parent
• Is the  student  the parent's dependent. yes
• Box 1 of the 1098-T 7335.00
• box 5 of the 1098-T  blank
• Any other scholarships not shown in box 5 no
• Does box 5 include any of the 529/ESA plan payments (it should not)  it's blank
• Is any of the Scholarship restricted; i.e. it must be used for tuition no scholarships
• Box 1 of the 1099-Q  5 distributions totaling 7544.93
• Box 2 of the 1098-Q  5 totaling 3087.11  
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)? parent
• Room & board paid. If you live off campus, what is school's R&B charge no room and board
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers  686
• How much taxable income does the student have, from what sources  not much-part time job. I didn't put any of this on his tax return.  This shouldn't matter if parent is the recipient, correct?
• Your AGI after IRA deduction  It depends on how much I deduct.  I can make it fall just above or just below the $180,000 cut off.

[trishd55]

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.   This is not true in my case.  Turbo Tax enters the info from box 2 without accounting for the expenses.

On form 1099-Q, instructions to the recipient reads: ".... You must determine the taxability of any distribution."  Isn't Turbo Tax supposed to help us do that when we answer the questions?

[Hal_Al]

You are allowed to use room & board, for a 529 plan, even if the student lives off campus. 

You are allowed to use food  expenses for a 529 distribution, even if the student lives at home. You may use actual cost or the school's meal allowance, for on campus students, whichever is less.  That should be pretty close to the $4000 you need to claim the AOTC.

$7335 + $686 + Board allowance - $7545 (used for 1099-Q) = amount available for AOTC.

Don't report the 1099-Q, at all (delete it if you already entered it).

Enter the 1098-T, on your return, with $4000 in box 1 (or "amount available for AOTC" from above, whichever is less).  Don't enter any other numbers. 

[Robert99Peters]

Thanks again Hal_AI.

I tried again and entered the info for form 1099-Q and, somehow was able to get to the workflow where I was able to enter my kid's qualified college expenses.  I entered tuition, board and room amounts that (far) exceeded the amount of box 1 in 1099-Q.  My federal refund certainly increased, but not quite to the level had I not entered 1099-Q at all, it was approx $150 short.  I'm sorry, but something is not quite right with how TurboTax is managing qualified 529 distributions...

As stated previously, given that all of my 529 withdrawals are for qualified educational expenses (and I have the receipts to prove it), I will NOT be including 1099-Q info in my tax return.  

[trishd55]

Thanks Hal_Al.

I understood the earlier example:

Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

The above example requires adjusting the number in Box 2 of the 1099-Q (which it seems like Turbo Tax should be able to do) as opposed to deleting the form.  

I don't understand the example you just provided so I am going to stick with the best scenario of the six that I originally tried.  I had hoped Turbo Tax would look into this.   I still believe that something is wrong with the way it is calculating.  If I didn't notice it (because of the state taxes) I would have owed over $600 more in federal taxes and $200 more in state taxes.  Which in not Turbo Tax 'finding all of our deductions'.

I appreciate your efforts on this.

[Hal_Al]

Last example: $7335 + $686 + Board allowance - $7545 (used for 1099-Q) = amount available for AOTC.

Let's use $3000 as the board allowance.  I'll put these numbers in the same format as the first example.

  $11,021 in educational expenses(i7335 + 686 +3000)

   -$0 paid by tax free scholarship

   -$4000 used to claim the American Opportunity credit

 =$7021 Can be used against the 1099-Q 

Box 1 of the 1099-Q is $7545

Box 2 is $3087

7021/7545=93% of the earnings are tax free

93% x 3087 = $2873

You have $214 of taxable income (3087-2873)

TurboTax can handle this, but you have to enter the numbers correctly. In fact, it's the scholarship part that makes it difficult. With no scholarships, your situation is straight forward.

But, you are right there is a sort-of glitch in TurboTax. It will assign all the available expenses to the tuition credit; then present you with a screen titled “Amount Used to Calculate Education Deduction or Credit” You have to know to change that amount to $4000 (there is an explanation and instructions on that page).

[kennethabaetz3644]

Where do I report the "Qualified Expenses" against distributions?

Reporting the distribution creates a tax liability.