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.
If you have two 1099-Q, one in your name and one in the student's name; then you each report one on your own return.**
Even though one of 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/she is your dependent.
You can and should claim the tuition
credit before claiming the 529 plan earnings exclusion. 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 and you an exclusion from the
taxability of the earnings (interest) on the QTP. 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. Since you have two 1099-Q, you should use the rest of the expenses against you 1099-Q first, assuming you are in a hugher tax bracket than your student. Any expenses left over would be used on her return.
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)
-$3000 paid by tax free scholarship
-$4000
used to claim the American Opportunity
credit
=$3000 Can be used against the 1099-Q
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)
**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!
