How do I enter this.

[Jorgen]

Even the Live Tax Advice was not able to explain this to me.

My daughter is my dependent and I claim her as such on my taxes.

She filed her own taxes because she works.

She got a 1099-Q with her as the Recipient and filed that and the College 1098-T.

On HER 1099-Q she has

Box 1 - 33689

Box 2 Earnings 11551

Box 3 Basis 22128

Her 1098-T shows

Box 1 Tuition 58525

Box 5 Scholarship 37000

She is NOT claiming education credit -  and she ended up having to pay small amount of Kiddie Tax because she took out a bit more than the qualified expense (58425-37000 = $21425) so tax based on $12255 excess.  So far so good...

Now to MY return

I also took money out of the 529 Plan...

My 1099-Q listing for me shows

Box 1 39098

Box 2 Earnings 13186

Box 3 Basis 25912

I spend some of that Money paying for qualified Expenses for my daugher.

$3110 Went to pay another college sommer class we have a 1098-T from

$18910 was spent paying Room and Board to the First college that my daughter submitted for

and $907 on a new Computer.

So the Total of Qualified expenses are $22927.

So I end up with 39098-22927 = 16161 in Excess distributions. And TT calculates my taxable part to be $5454.  

I am fine with that.   I am NOT claiming any educational credits - I earn to much.

But here is the problem. For me TT wants to add a 10 percent penalty on the $5454.  

But because my daughter received $37000 in Scholarships - There is supposed to be an exception to the rule...   Anyone is allowed to take out up to the scholarship amount without penalty.

I have no idea how to get TT to understand that she got that scholarship.

If I enter the 1098-T as is from her college - the numbers gets messed up.

Right now I faked the 1098-T for her college.

I told Turbotax the Actual Tuition paid was $37000 and in box 5 $37000 - that results in the Tuition expense being a total of 0 on the worksheets - but it honors the scholarship during the 10 percent penalty calculation.

I am afraid running into problems because now the 1098-T does not match what was sent to us - but is it wrong???

[Hal_Al]

Q. How do I enter this.

A. Very carefully. You have to enter the expenses at the 1098-T section,  making adjustments in your entries for expenses and scholarships allocated on her return. You need to show the scholarship amount matching the non qualified portion of your distribution. 

As I explained at your other post*, it's best to use a workaround in TurboTax:

Enter the 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Also enter the amount of the scholarship in the box "Tax-free assistance"**.  This reports the earnings as taxable and claims the scholarship exception. You do not have to deal with the complicated adjustments needed in the  “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception.

*https://ttlc.intuit.com/community/college-education/discussion/2024-education-1099-q-calculations/00...

** In addition to the expenses, you paid with your distribution, also enter the expenses that were paid by the scholarship. This will show that scholarship paid the same amount of expenses (as the non qualified portion of the distribution) qualifying you for the penalty exception. 

[Hal_Al]

I revised my answer above, to add "In addition to the expenses, you paid with your distribution, also enter the expenses that were paid by the scholarship.  This will show that scholarship paid the same amount of expenses (as the non qualified portion of the distribution) qualifying you for the penalty exception. "

If her income from working was less than $14,600, she can declare some of her scholarship as taxable to reduce the amount of the 529 distribution that is taxable and subject to the kiddie tax.

[Jorgen]

Hi,

That last update made much more sense to me - it was what was missing from the prior responses. 

The Scholarship is $37000 and I added the additional $37000 to the expenses and now the tax numbers match what I had calculated they should be....

Final question (sorry).

'If her income from working was less than $14,600, she can declare some of her scholarship as taxable to reduce the amount of the 529 distribution that is taxable and subject to the kiddie tax.'     

Her Scholarship is $37000 - and on her Return she is currently only reporting the tuition from the 1098-T.   (I paid Room and Board on my return).

Are you telling she could do something like. (assume she has other earned income of $2000).

Report that  $12600 of the Scholarship was spent on Room and Board Expense (making it taxable)

 Report that $24400 of it was spent on Tuition?  

Is it really allowed to shift the expenses like that to avoid part of the Kiddie tax? 

I would be concerned since I am also claiming I paid her Room and Board on my Return - But I guess I could simply reduce my Room and Board part by $12600  and increase the Tuition part on my form by that $12600 instead.  

[Hal_Al]

Q. Report that  $12600* of the Scholarship was spent on Room and Board Expense (making it taxable)

 Report that $24400 of it was spent on Tuition? 

A. Basically yes.  But more specifically, you're just saying that much of the scholarship is not  being allocated to tuition. Note that the entry, in TurboTax, for allocating the scholarship to R&B says “or other expenses”. You didn’t have to literally use the scholarship for R&B.

Q. Is it really allowed to shift the expenses like that to avoid tax on part of the non qualified 529 distribution (application of the kiddie tax is an off shoot of the taxability of the distribution)?

A. Yes. The IRS actually encourages use of this technique, allowing parents to claim a tuition credit.  From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.  The same principal applies whether shifting the expenses to  a credit or  the 529 distribution. You cannot use this "loop hole" if the conditions of the scholarship are that it must be used for tuition. 

* Actually only $12,150 (12,600 -450). A dependent's standard deduction is her earned income + $450, but not more than $14,600.  Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement and the dependent standard deduction calculation (earned income + $450 for 2024).  It is not earned income for the kiddie tax other purposes (e.g. EIC).