Handling various 529 distributions to get to AOTC in TTax

[TaxGPVA]

I'm not sure how to handle in TurboTax reporting my child's college expenses when there are multiple 529 sources and I'm trying to get AOTC credit.

I'll use round numbers for simplicity. 

• My freshman child has qualified college expenses of $20,000. 
• Grandparent A paid $5k toward them through 529 for child (distribution to school)
• Grandparent B paid $12K toward them through another 529 for child (distribution to school)
• I paid $1k for required laptop (took distribution from 529 I have for child). 
• I paid another $2k for remainder of qualified expenses (not from 529) and want to claim that $2k for AOTC.

Child does not have other income to report.  Since Grandparent 1099-Q's go to child, I'm confused as to how to report it in TurboTax Deluxe. 

TTax currently claiming $2500 for AOTC when I know it should be $2000 - I'm identifying child's expenses of $20K vs. just the $1k 529 distribution I took so it's taking full $2500.  I didn't think I should/could enter the 1099Q's from grandparent 529s that are in child's name....but how else to reduce qualified expenses properly so I end up with $2,000 AOTC?

What steps to take in TTax?  Enter child's 1099-Qs from grandparent distributions?  Reduce numbers from 1099-T of qualified expenses?  Or something else?

[SusanY1]

Before I give you an answer to this I want to clarify the amounts that you are including in the qualifying expenses of $20,000.  

The IRS has one definition of qualifying expense for the credit and another for distributions from the 529 plans. 

Does the $20,000 represent tuition and required fees only?  Or does it include other items such as room, board, activity fees, books, supplies, or any other expenses not required for attendance?  

[NCperson]

beyond the question @SusanY1 asked, what is in Box 1 and Box 5 of the 1098-T? any numbers in any other boxes? if so, what are they? 

to simply your question, and awaiting @SusanY1 response, the 1099-Q are reported on the tax return of the person whose social security number is on the form, not who owns the 529 plan.  So you should find that you child's ss# should be on the forms via the grandparents 529 plans since those payments went directly to the college.  If you child is required to file, these 1099-Q's should be filed on the students tax return! 

[Hal_Al]

First, and most important of all, you should claim $4000 of expenses for the AOTC!  This will result in you son reporting a small amount of the 529 distributions as taxable income.

Treat the $1000 distribution you took in you name as qualified (non taxable).  Treat the grandparents distributions as described below.

For 529 plans, there is an “owner” (usually the parent and sometimes a grandparent or other relative), 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 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. 

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 (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

The student has $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!  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.  I

[NCperson]

@Hal_Al - while I totally agree with your example, have you run it through TT?  I tried it just to test out that TT handles it properly and TT continues to think the $600 of earning is subject to regular tax (it properly does not create the 10% penalty)

while I see your comment that you can not just report it, that moves the control from TT to the Taxpayer and THAT is what causes variation and inaccuracies in reporting.  You'd think TT would just request input of the 1098-T and the 1099-Q, ask about the non-qualified expenses (which it does) and be able to figure it out itself....or is there a bug???

any thoughts? 

[Hal_Al]

@NCperson  - I have no tried it in the 2019 program, but it worked properly last year. 

I don't think there's a bug, but it's too complicated for the average user. 

[NCperson]

I am not the average user, and I couldn't get it to work...... would you mind trying it?

the problem is that after inputting everything on the 1099-Q and the 1098-T per your example, if you look on the student worksheet in section VIII, it says in the 'regular' column (the left one), that the ALL the earnings are taxable and it carries that taxable amount forward to schedule 1.   Further, line 2d is blank (in section VIII) and it is an input field - which I think is the root cause of the issue - why isn't TT calculating that when it calculated the right column even though that is also an input field?

The way you laid out your example, I agree with, but TT doesn't behave that way. 

so can you please try it and see what you get? Maybe I am doing something incorrectly, but it's not that hard.  

[Hal_Al]

I'm actually expecting a 1099-Q and will be doing a "real world" case in a few days. I'll report back

[TaxGPVA]

Susan - the breakdown of expenses are:

- $12,000 for tuition and required fees

- $6,000 for room and board

- $1,500 for required laptop

- $500 for books and supplies

NCPerson: I haven't received the 1099-T yet but expect the answer to that question (and what I'm tentatively entering until I receive it later this month) is $12,000 in box 1 and $0 in box 5 (no scholarships/grants).

I am aware of how the account owner, beneficiary and recipient rules work so am following that.

What I have found since posting this question is that the TTax interview seems to allow/expect me to enter all of the various 1099-Qs as it asks me who the recipient is and allows me to enter my child as the recipient on 3 of the 4 1099-Qs I'm expecting.  I'm not sure how to square that - entering all 1099 Q's during the interview, noting that 3 of 4 have my child as recipient, vs. the instruction that my child must file a separate return for the expenses and 1099 Q's even though my child is a dependent and has no other income.

Thanks and let me know if other clarifications are needed.  

[NCperson]

@TaxGPVA - the reason TT asks for all the 1099-Qs to be enter and then all the questions is it decides based on those answers which 1099-Qs to entertain and which ones to dismiss as the average person wouldn't know what to do. So rather than explain all the rules to the average person, TT just asks you key them all in and then it decides which ones to use and which ones to dismiss - there is less risk of error that way. In fact, as detailed below, TT needed the grandfather's 1099-Q to be part of the equation because too much was distributed in total from the 529 plans (small, but see below)

The  "maximizer" in TT it is going to use AOC at $2500 - because $2500 of credits are more valuable than $2500 of deductions.   You are better off with the $2500 of AOC credits!  That will drive a $1,000 credit on line 18c of the form 1040.  if you "insist" that AOC only use $2000, your credit will only be $800 and you will not get back the other $200 any other way. 

That leaves $17,500 in college expenses to deal with.  Assume $2,500 of the tuition is covered by the AOC credit. 

The three 1099-Q disbursements are $18,000.... and all the remaining expenses are qualified expenses by the 529 plan.  This mean that $500 more than is required was disbursed.  That also means a small part of the Box 2 earnings on YOUR 1099-Q are subject to tax and you will see that on line 8 of Schedule 1.   That is because it wasn't needed to cover the expenses- you can't double dip and have both the 529 disbursements and the AOC credit cover the same dollar of college expenses.  The penalty for attempting to "double dip" is that part of the Box 2 earnings are taxable.  (the Box 3 cost basis was all after tax to begin with so there is no impact)

The $2000 that you came out of pocket for has no real bearing on the situation! 

I was able to create a dummy tax return in TT to confirm this result.

ps, because your child has no other income, there is no further reporting requirement of the 1099-Q's on his tax return because he is not required to file! 

hope that makes sense! 

[TaxGPVA]

NC - thanks for the reply.  I'm not complaining about $500 more in credits, believe me.  I just want to make sure that I'm entering it the right way to avoid my return incorrectly claiming more than is due.

One question I do have is your point about there being $17,500 remaining in expenses.  My current understanding is that the AOC counts the first $2000 dollar for dollar against my out of pocket expenses, but the remaining $500 is credited at a 25% rate, so I actually need to have $4,000 in out of pocket to claim the full $2,500 in AOC.  Is that not right?  The way I'm interpreting what you wrote, it would seem that it would only take $2,500 in out of pocket expenses to realize the full $2,500 AOC credit.

If my understanding is true, it would seem that instead of $500 being non-qualified, it would be $2,000 and I'd pay taxes on the earnings portion of that $2,000.  And TTax will calculate through the optimizer which is the right way to go to maximize my taxes - either claim the full AOC credit and allow some of it to be considered non-qualified and taxable or claim a lower AOC credit.

This is my first year dealing with these college expenses so I'm still very much learning!

[Hal_Al]

the remaining $500 is credited at a 25% rate, so I actually need to have $4,000 in out of pocket to claim the full $2,500 in AOC.  Is that not right?

Half right.  The first $2000 is dollar for dollar, the next $2000 is 25%, up to $500.  So, it takes $4000 out of pocket expenses  to get the full $26500 AOC credit.

So, it's $4000 that would not be qualified*.  But the full $4000 isn't taxable; only the ratio of earnings to distribution x $4000.  See example above.

*Apply the $4000 to room and board to make it qualified.  Room & board is not a qualified expense for a tuition credit, but it is for a 529 distribution.

[NCperson]

let me go back for a slight amendment as you have a point .

1) you can see how the AOC is calculated on form 8863 / lines 27 - the expenses consumed to get the credit are $4,000. 

2) that leaves $16,000 of expenses left to consume from the original $20,000.

3) on the student info worksheet, the following numbers should be reflected (based on your example)

line 5 - $500

line 6  - $6,000

line 8 - $1500

line 1 should be pre-populated with $12,000

line 13 should total $20,000 (pre-populated)

line 17 - $4,000 - this is the $4,000 consumed by AOC

4) then ensure the optimizer is run on part VII / line 4 of that same student info worksheet 

5) click the 'quick launch' and on the pop-up, click the button on line 1 to ensure the optimizer is launched 

6) On the 1099-Qs, just for argument sake, I punched in $100 of earning on  YOUR 1099-Q and then $1000 of earnings collectively on the grandparents 1099-Q (adjust line 3 so it's the net of Lines 1 and 2)

7) if you review all the 1099-Qs, the sum of Line 1 should be $18,000 which is what was disbursed

😎 line 2b should sum to $16,000 which is the $20,000 of expenses less the $4,000 that was consumed by AOC

9) that means $2,000 too much was distributed from the 529's collectively.

10) that ratio of $2,000 too much divided by $18,000 disbursed is 11.1%, so 11.1% of the Line 2 earning is taxable. 

11) you should find $11 of taxable income on YOUR 1099-Q which will carry over to Schedule 1, line 8

12) you should find $111 of taxable income on the SUM of the grandparents 1099-Q which should be carried to your CHILD's tax return.  But if your child does not need to file, it's just nice wallpaper!   

does that now make sense? 

[TaxGPVA]

Makes perfect sense and was exactly what I was looking for to better understand how TTax was handling things. 

I really appreciate everyone's patience and detail.

[Hal_Al]

@NCperson  - I received my 1099-Q and 1098-T and made the entries in TT (I have download Deluxe). I was pleasantly surprised; everything worked as it is suppose to.  I don't know if that's attributable to upgrades since we last visited this problem.