Input of 529 tax-free withdrawals to pay student loans?

[jill_RAD67]

Hi there.

I have both qualified education expenses and qualified loan repayments that I made from a 529 in 2023. 

I can't figure out how to get Turbo tax to not make me pay tax on the qualified loan repayment.  No matter what I try, the loan amount will not show up on page 3, line 2a of the 1099-Q worksheet and so Turbo tax is making me pay unnecessary tax.

I'm desperate for help.  Thank you!

[Hal_Al]

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, or loan payments to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses and/or loan payments, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

References:

1. 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." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

That said, the 1099-Q interview  has a screen titled "Principal or interest payments on qualified education loans". Answer yes and enter the amount of loan P&I paid. 

[jill_RAD67]

Thank you for replying.

Yes, I had already entered the amount of my student loan payoff.  I went through the interview multiple times.  I did see they ask that question in both the 1099-Q and the 1098-T sections.  After all of that and trying a few other things - I could NOT get the loan payment to show up on page 3, line 2a. 

I did just end up removing all the 1099-Q's.

It just seems like Turbotax should be able to make this work?!  I'd love to figure out how it can work within the software so all the information can be entered and tracked within that.

Moving on for this year.

Thank you very much for responding to my question.

[mmatrull]

I had the same issue as you.  There is no way to enter the re-paid loan.  Turbotax however is not even reducing the taxes for the other fully qualified expenses I have so I'm trying to figure that out first.  I may just skip entering the 1098-Q also.  Can't believe I pay for TurboTax Premier and it can't even handle something simple like this.

[AmyC]

Can you clarify, are you trying to get the student loan deduction or are you saying you are struggling to subtract it from the 1099-Q?

@mmatrull 

[mmatrull]

I'm not trying to get any deduction.  Just trying to show that all of my higher ed expenses are legitimate and qualified so I don't get taxed on the 529 distribution.  Turbo Tax wants me to pay for my 529 earnings even though they all went to pay for qualified expenses.

[Hal_Al]

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. 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 tax forms. But, it will prepare a 1099-Q worksheet for your records.

It sounds like you really want that work sheet, even though you don't need it.  You own records will suffice in case of an IRS inquiry.  It happened to me. I just sent them my billing statements and that took care of it. 

If you haven't got TT to do it right yet, you never will in the standard interview.  Here's the work around:

Delete the 1099-Q and 1098-T, you already entered. 

The workaround is: Enter the 1099-Q. When asked who is the student, check "someone else not listed here" (Lying to TurboTax to get it to do what you want does not constitute lying to the IRS). On the next screen, enter the real student's name.  This will eventually give you one simple screen to enter all expenses. Press Done at the 1099-Q summary screen, to get there. 

[jill_RAD67]

I have your same scenario - my main concern was showing all of my higher ed expenses are legitimate and qualified so I am not taxed on the 529 distribution.  Turbo Tax was taxing me - indicating I had 529 earnings, saying the American Opportunity Credit didn't apply , not showing the student loan pay-off as use of 529 funds and on and on.  Pretty much, I couldn't get Turbo Tax to handle any of it correctly.  I was trying everything I could think of through the standard interview and through the back-end.  I know this is probably not helpful, but I gave up and removed my 1099-Q's from Turbo Tax - I have all my records/supporting documentation for all of this outside of TurboTax.  I did keep the 1098-T information in Turbo Tax for the calculation of the credit.  I don't think my response is probably very helpful to you - just wanted to say I agree with your frustration.  This is not difficult and Turbo Tax should be able to accurately handle all of this - the price keeps rising but I experience something it can't do every year.  Frustrating.

[regeird11]

Same thing here.  Hello TurboTax, this is a common scenario!!??  Have been using TT for literally decades but I've just about had it.  

[AmyC]

You should not be entering the 1099-Q. The IRS does not want extraneous information.

@jill_RAD67  @regeird11 

IRS Publication 970, Tax Benefits for Education states:

If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions.

Page 45  repeats: Don't report tax-free distributions (including qualifying rollovers) on your tax return.

[bl275]

This isn't covered in the TurboTax interview. I entered mine in TurboTax Premier 2024 by using View > Forms > Form 1099-Q  > under the section Qualified Tuition Program (QTP) > Line 2a Qualified Loan Payments, right-click > override > enter you loan payments up to $10,000 lifetime. 

[AmyC]

If you have taxable income,  the Q exceeds the loan repayment, you can enter the 1099-Q in Premier under Deductions and Credits. If the 1099-Q is not taxable, it should not be entered.

@bl275