Help with reporting 1098T and 1099Q

[tpage70]

I apologize for having to ask this question, but I cannot find the answer in the forums to my specific questions. My daughter is a full-time student and only earned about $2200 last summer as a waitress. I am the owner of a 529 where she is the beneficiary. All withdrawals from that account have been for qualified expenses (tuition, room & board and a laptop). Except for the laptop, all payments from the 529 have gone straight to the university so a 1099Q was issued in her name. I received a 1099Q for the withdrawal for the laptop since I paid for it and reimbursed myself. My daughter is also a scholarship recipient, which only covers tuition (no room and board), and she received a 1098T. Since she is my dependent, I reported her 1098T and my 1099Q on my return. When I report her 1099Q in her return, TurboTax shows that my daughter owes $1600 in taxes for it. I have twice gone through the full interview for the education section for both my return and for hers and nothing changes.

One bit of information that I believe might be causing this problem that also might help in your response is that I actually made 3 tuition/room & board withdrawals in 2019 that might not reconcile with the scholarship amount on the 1908T. I paid for the Spring, 2019 semester on January 3, 2019; I paid for 2019 summer classes and the Fall, 2019 semester on August 13, 2019; I paid for the Spring, 2020 semester on December 18, 2019. When I add the total in box 1 on her 1099Q to the total in box 1 on my 1099Q, the amount is exactly what is shown as all YTD withdrawals on my 529 statement for 2019. So could 3 withdrawals for 3 semesters (reported on her 1099Q) against 2 semesters worth of scholarship (reported on her 1098T) be why the calculations show that taxes are owed by my daughter? If so, how do I rectify this? I can't find any worksheets that help correct this problem.

Otherwise, here are other questions if have:

1. If all withdrawals were made for qualified educational expenses as listed above, should any taxes be owed for withdrawals?

2. If no taxes should be owed, do I have to report her 1099Q at all? I have read in some replies that as long as I have good records that show all withdrawals match all qualified expenses, I don't need to even report a 1099Q.

3. If taxes are owed this year, how do I need to utilize the 529 in the future to avoid taxes being owed for qualified educational expenses?

Thanks in advance for your help!

[MarilynG1]

First of all, the Box 5 reporting Grants/Scholarships on the 1098-T contains no info about your 529 withdrawals.

If Box 1 is larger than Box 5, you qualify for an Education Credit.

You don't need to enter the 1099-Q on your return.  Your daughter will enter it on her return (if she is required to file a return) and be taxed on any excess distribution.

If she is not required to file a return, then it doesn't get reported anywhere; just keep it for your records.

As long as 1099-Q funds were used for Qualified Education Expenses, it is not taxable.

Click this link for more detailed info on the 1099-Q. 

[Hal_Al]

You found the problem but you also found the solution.  The problem is: it's complicated.  The solution is just don't report the 1099-Q .

Q. 1. If all withdrawals were made for qualified educational expenses as listed above, should any taxes be owed for withdrawals?

A. 1. No.

Q. 2.Do I have to report her 1099Q at all? 

A. No.  If your student-beneficiary has sufficient educational expenses, including room & board (even if she lives at home) to cover the distribution.  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. It will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

That said, you may want to pay a little tax on the 529 distribution in order to claim a more generous tuition credit. 

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)

[tpage70]

Box 1 on my daughter's 1098T is larger than box 5. Box 1 on her 1098T is also larger than box 1 on the 1099Q reported for her. This should indicate the withdrawals did not exceed what was paid out in education expenses, correct? If that is correct, it is my understanding that no taxes should be due at all. Yet when I include the 1099Q on her return, she is shown to owe taxes on those withdrawals. This issue did not occur last year when I completed returns for myself and for my daughter.

I am completing a return for my daughter since she had a summer job in 2019 and received a W2, so I assume she is required to file a return. If I am incorrect in that, please let me know. Because her income level was very low, TurboTax is calculating a small refund for her. That is until I enter the 1099Q. She goes from a refund of approximately $130 to a tax payment of $1600 and she only earned $2200 in her summer job.

I did read the information from your link on 1099Q reporting. My daughter's situation isn't really addressed in the article, though. I don't understand why TT is calculating a tax payment for her when the amounts paid to her school for tuition and related expenses exceed the gross distribution on her 1099Q. This statement from that article makes me think I don't need to report the 1099Q on her return: "For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return." Am I correct in this? If not, how do I report it without causing a tax payment due on her behalf?

[SusanY1]

It sounds like Form 1099-Q is entered into TurboTax for her but no education expenses are also entered to offset it, which is why it looks like taxable income to TurboTax.  

Since you know that she had more than enough qualifying expenses to offset the distribution, the easiest and best way to handle this is to remove Form 1099-Q from TurboTax.  The IRS does not require that this form be entered on any tax return unless there is a taxable distribution to report. 

For her Form W-2 she may not be required to file depending on the amount of her total income,  but since she is getting a refund she should file so that the money is returned to her.  

[tpage70]

@SusanY1, I read your response to my question and I have been stressing over it a bit. My return and my daughter's return are both completely ready for submission. Even though your suggestion to just leave my daughter's 1099Q out of her return is consistent with other responses I've read, my OCD is making it hard for me to pull the trigger and submit hers and my return without it. I fear an audit and I don't want to set myself or her up for one by not including the 1099Q. At the same time, I don't think my daughter should have a tax payment due on the withdrawals made for qualified education expenses.

I spoke to a CPA through the TurboTax help line and at first he insisted that the 1099Q should be reported. So the ONLY way to erase my daughter having a tax payment was to remove her as a dependent and file both the 1098T and 1099Q in her return. It eliminated a tax payment for her, but it also reduced the credits my wife and I received as her parents. I had him read your answer to my original posted question and he immediately changed his stance on my daughter including the 1099Q. So it left me with a little more confusion with him changing his instructions so quickly.

I just want to make certain that NOT filing a 1099Q that was issued for my daughter will not increase the likelihood of an audit for her. As I had stated before, the ONLY withdrawals made from my daughter's 529 were used to pay for tuition, room & board and for a laptop I purchased for her. And I have documentation to support every withdrawal. There was nothing else withdrawn from her 529 account.

Sorry to bother you again, but I just need confirmation that I'm not making a mistake. Thanks!

[Hal_Al]

When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax (TT) will enter nothing about the 1099-Q on the actual IRS tax forms.  So, the IRS will not know that you entered it in TT.

I've seen it suggested that you manipulate the numbers so that you make a small amount of the distribution taxable, so that something about the 1099-Q  appears on your  forms.  I actually did that. I still got a notice from the IRS. A simple letter of explanation and copies of the schools billing statements took care of it.

____________________________________________________________________

" Box 1 on my daughter's 1098T is larger than box 5. Box 1 on her 1098T is also larger than box 1 on the 1099Q reported for her".

Q, "This should indicate the withdrawals did not exceed what was paid out in education expenses", correct?

A. Not exactly. It would be more correct to say that if box 1 of the 1098-T exceeds the total of  box 5 of the 1098-T PLUS box 1 of the 1099-Q; then none of the withdrawal and none of the scholarship is taxable.  But if box 1 of the 1098-T is less  than bx 5 + box 1 of the 1099-Q; then something is taxable. It's either part of the scholarship or part of the 529 plan earnings (box 2 of the 1099-Q); or a little of each.  You get to decide, based on which works best for you

[tpage70]

@Hal_Al, box 1 from both 1099Qs received (one to me and one to my daughter) are fully covered by qualified expenses, but TT still calculates taxes owed by my daughter every time I enter the information into her return. So TT is not just entering nothing on the actual IRS forms as mentioned. It's calculating a $1600 tax bill to my daughter every time.

As for manipulating the numbers, I wouldn't know how to do that on my return or hers. Plus, I don't understand why I would want to make any distribution taxable on purpose. I think it has been mentioned before that by doing so, I can increase the education credit I receive for my daughter. Well due to my 2019 income, I'm already not receiving an education credit so I don't think making any portion of  it taxable will help me.

This issue did not happen last year when I entered the 1099Q received by my daughter on her return. My guess for why this is an issue this year is that we made 3 tuition/room & board withdrawals in 2019 instead of 2 (as explained in my original question). It could also be that earnings in box 2 of her 1099Q are high relative to the total withdrawals made, but if all those made are covered by qualified expenses it shouldn't matter anyway.

I know this...I've had my return and my daughters fully completed and ready to submit for 2 weeks but I haven't because of this one issue. I just don't want to submit an incorrect return for either of us and have to deal with an audit. And I don't want either of us to pay taxes on 529 withdrawals that were solely used for qualified expenses if we aren't required to do so.

[SusanY1]

I understand the hesitation to leave off the information about Form 1099-Q. It may help to note that on the form itself, instructions to the recipient, it 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."  

The IRS, honestly, has a bit of a hard time determining which taxpayer the form "matches" to in many instances to request information, so it's not very common to get an "audit" concerning this form - although not unheard of (as you have seen from comments here.)

It's our nature, even the nature of my colleagues, to enter the data from all tax forms on our return.  Sometimes, though, doing so just complicates things and the way that many of the education tax components intertwine is an example of how that sometimes is the case. 

IRS letters rarely come in friendly packaging, and the simple thought of them is rather scary for most of us so, naturally, we want to do everything we can to avoid them!  I imagine this to be even truer when it comes to our children's returns.

As Hal_Al pointed out- what you enter into TurboTax doesn't translate into notation on the tax return of "1099-Q entered" if no taxable income ends up on the return, so it won't avoid any IRS inquiry anyway.  

Also, keep in mind that since you have receipts and records that show you did spend the 529 plan funds on qualified education expenses, getting a letter from the IRS isn't anything to worry about anyway!  All it will "cost" you is a little bit of your time should it happen.  

The best thing to do, in my opinion, is to leave off the 1099-Q if you are certain that you have expenses to match 100% of the distribution and just keep your printed copies of those expenses in a folder that is easy to get to for the next three or so years.   That way, if you get the dreaded letter from the IRS, it won't take much time for you to dig up the receipts - you will already have them handy. You can make copies, drop them in the mail or fax machine - and be on your way. 

Keep in mind, too, that if you do get that letter, TurboTax agents are here to help you respond to it all year long with our Audit Support Guarantee.  

[hockeyalexx97]

Hi Susan, thanks for your messages earlier in the thread. It has helped clarify some of my confusion. I've waited for calls from a TT specialist for over 3 hours total - each time I encountered an issue with the call. 

If you could possibly help with my situation, that'd be greatly appreciated. 
I finished college in 2019 and received my 1099-Q and 1098-T.

The Box 1 (total gross distribution) on my 1099-Q  is a few hundred less than Box 1 (Payments Received for qualified tuition and related expenses) of my 1098-T.

However, when I subtract Box 5 (scholarships) from my Box 1 (Payments Received for qualified tuition and related expenses) on the 1098-T, the total gross distribution on my 1099-Q ends up exceeding the remaining amount by a few hundred. Therefore, to my understanding, I owe taxes on this excess.

This brings me to my current confusion. Do I still qualify for AOTC? TT and an IRS survey says yes, but I've read articles on TT that say if I use a 529 to pay for expenses, I am ineligible. Another question is how do I actually file this excess amount? TT articles say to mark it as "Other Income", but where is this "Other Income" field? I didn't receive a 1099-MISC or anything.
Do I just report the excess amount on the 1099-Q subsection? This doesn't make sense as TT asks for the box values. Given the amount I owe after filling that subsection using the box values - not the excess - I'm worried that the system thinks I used all of funds on Box 1 in the 1099-Q on ineligible education expenses. 

[DavidS127]

There is a screen in TurboTax that asks how you want to allocate your qualified education expenses between the education credits (e.g., AOTC) and your 529 plan (1099-Q) distribution.  If you use the 529 plan distribution to pay your qualified education expenses, those same expenses cannot be applied to the AOTC.  So, make sure you complete all of the education section questions to find the "allocation" screen for your section 529 plan distribution.

It is usually better from a tax standpoint to allocate your qualified education expenses to the education credits (AOTC ) first, and any remaining amounts to the 529 plan distribution.  But, you don't want to allocate any more than necessary, e.g., $4,000 is the maximum amount of qualified expenses that can be used for the AOTC, but if the amount of your 1098-T expenses after the scholarship is less than $4,000, enter the lesser amount on the allocation screen.

Note also that the 529 plan can be used for expenses not reported on the Form 1098-T and not eligible for the AOTC, including:

• room and board, books, fees, supplies and equipment;
• purchases of computer or peripheral equipment, computer software, or internet access and related service (used primarily by the beneficiary enrolled at school); and,
• payments on qualified student loans. 

So, make sure you have entered all these in TurboTax for the year you received a distribution; there is a 1098-T screen that "opens up" boxes for these if you have a 1099-Q entered.

If your 529 distribution exceeds your qualified expenses, the earnings portion of the distribution will be taxable, and may be subject to an additional 10% penalty.  There are exceptions to the penalty, but those exceptions are limited. But, the scholarship will be taken into account for this, i.e., you won't get a penalty for qualified education expenses that were covered by a scholarship.

Note that the allocation between education credits and 529 plan distributions can also be done in the Forms mode if you are using the Download/CD version. Go to Forms mode and find your "Student Info Wk".  Scroll down to Part VI and find line 17.  If you enter $4,000 on line 17, TurboTax will first use $4,000 of your qualified expenses for the education credits/deductions (e.g., AOTC) and then use any remaining expenses you entered to apply against the 1099-Q distribution.

@hockeyalexx97

[Hal_Al]

@DavidS127 

"There is a screen in TurboTax that asks how you want to allocate your qualified education expenses between the education credits (e.g., AOTC) and your 529 plan (1099-Q) distribution"

I've never seen that screen. I have Deluxe desktop.  Can you provide a screen shot? Is it new? Is it only available in online versions? How do you get to it?  It's definitely something that is needed.  What I have seen is a screen that called  "Amount used to calculate education deduction or credit". It's usually pre-populated by TT, but the user can change it.

[Hal_Al]

@hockeyalexx97 

Q. Do I still qualify for AOTC? 

A. Probably not, but not because of the scholarship and /or 1099-Q. Those can be worked around.  You say you "finished" school in 2019.  Graduation year is usually the 5th calendar/tax year for college. That usually means that your parents (and/or you) have already claimed the credit the maximum 4 times. Furthermore,  a full time  student, under age 24, is not eligible for the refundable portion of the AOTC unless she supports herself with earned income.

Q.   I've read articles on TT that say if I use a 529 to pay for expenses, I am ineligible for the AOTC.

A. Not exactly.  What they are saying is you may not use the same expenses to claim both the AOTC and the 529 plan earnings exclusion (claim the 529 distribution to be tax free).  You cannot "double dip".  But you get to decide how you want to allocate your expenses between AOTC and the 1099-Q (it just ain't easy to do in TT). Actually, it's a 3 way allocation. You allocate your expenses to either AOTC, 529 plan (1099-Q) or scholarship. Which is better depends on whether you are still a dependent or not.

Q. How do I actually file this excess amount? TT articles say to mark it as "Other Income",

A. Yes, it goes on line 8 of Schedule 1 as other income. TT automatically puts the taxable portion of your 1099-Q, there after you enter the 1099-Q and all the expenses.

Provide the following info for more specific help:

• 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
• 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
• Has the AOTC already been claimed 4 times?
• If you are under 24, Was more than half your support in 2019 from earned income? 

[DavidS127]

@Hal_Al 

The "Amount used to calculate education credit or deduction" screen you mentioned is the same one I was referencing.  It is admittedly elusive in the TurboTax interview, whether Online or Download, and I often cannot get it to "present" every time.

It is easier by far to make this allocation on line 17, Part VI of the Student Info Worksheet, in Forms mode of TurboTax Download/CD.  I've had instances where an Online customer had to request a copy of Download from Customer Support in order to get the allocation correct in their tax return.

[JonthanH]

Hi, thank you for the detail noted in this post that tuition payments reported on 1098T can be allocated between education credits and 529 distributions in Forms mode in Turbotax (under Part VI line 17). This is an extremely important detail, and not something that should be buried in Forms mode in my opinion. 

As background, my son started college in the fall of 2021. I took a distribution from his 529 plan and used it to pay his tuition & fees + room and board. Since the entire distribution was used for qualified expenses I assumed all would be tax free. However I have since realized that if I want to allocate $4000 of those payments to claim an education credit, I need to adjust the amount used to offset the 529 distribution accordingly. As arcane as this sounds, it also strikes me as a not-uncommon situation for families to land in when figuring this out for the first time. 

This left me struggling with how to allocate payments reported on 1098T between my return (to claim $4K for AOTC since he is my dependent) and my son's return (to offset income reported on 1099Q in his name). Due to $4K AOTC adjustment he did owe a small amount of tax, so I needed to include 1099Q on his return. 

To get this right, I had to report the 1098T (which is in my son's name) on BOTH my return and his, and go into forms mode to specify the 4K allocation between the AOTC and 529 distribution (1099Q). This appears to give the right result, with me getting the tax credit and him paying the proper amount of tax. But it also feels odd to include the same 1098T on both my return and his, so I want to confirm I have this right, and would appreciate feedback from others if they have dealt with a similar situation.