Paid for part of my dependents college room and board from a 529

[powersj]

I paid for part but not all of my dependents college room and board with funds from a qualified 529.  On the education worksheet do I enter under room and board zero, only the amount I paid from the 529, or the total cost of room and board?

[KrisD15]

DEPENDS

Who paid the other portion of the room and board expense? 

If there is no other 1099 involved (no other distribution) and the room and board was not required to be paid with a scholarship, enter the entire room and board expense. 

If someone else took a distribution and paid part of the room and board expenses, or if a scholarship or grant paid it, you would need to reduce the room and board expense by that amount. 

[powersj]

I paid for it (of course!) out of our earnings.  So it seems I should list the full amount which according to the Student Information Worksheet Part VI Education Expenses will be applied towards offsetting any 529 earnings, but will NOT be used against the AOC or Lifetime Learning credits.  That seems to be right to me.

[Hal_Al]

It doesn't matter.  As you have identified, room and board are not qualified expenses for the education credit or for tax free scholarship.  It also doesn't matter if you actually used the 529 funds to pay for R&B.  All that matters is that the 529 distribution occurred in same calendar year that R&B was paid and that the total amount of R&B paid was greater than or equal to the amount of the distribution from the 529 plan (box 1 of the 1099-Q).

You are not required to report the 529 distribution on your tax return (or the student's). 

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.

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." 

[Carl]

Overall, when you have a 1099-Q I recommend you enter it in the program. If it doesn't need to be included in your tax filing, then the program won't include it. But it will still prepare the worksheets for that 1099-Q, which you should keep in case of an audit.

1099-Q Funds

 First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to and included in the total on line 7 of the 1040.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is included in the total on line 7..

Finally, out of pocket money is applied to qualified education expenses

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.

[powersj]

TurboTax did ask for my dependent daughters college expenses on my return.  Not sure I understand putting all the education expenses on her return when we are claiming the education credit on our return.

[gloriah5200 · Accepted solution]

Don't misunderstand.  If you claim the Education Credit on your return for your dependent daughter, then you are claiming her "qualified" education expenses for the Education Credit.  If she received scholarships or section 529 distributions in excess of qualified education expenses, she will claim that taxable income on her return generally.

It is generally more beneficial that way anyway because it will be less tax liability on claiming some scholarship or taxable

Qualified education expenses.

For purposes of tax-free scholarships and fellowship grants, these are expenses for:

• Tuition and fees required to enroll at or attend an eligible educational institution; and

• Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

Expenses that don't qualify.

Qualified education expenses don't include the cost of:

• Room and board,

• Travel,

• Research,

• Clerical help, or

• Equipment and other expenses that aren't required for enrollment in or attendance at an eligible educational institution.

If you go to IRS Publication 970, you will find that the qualified education expenses for the 529 monies are different than the qualified education expense for scholarship and fellowship grants...

What is the tax benefit of a QTP?

No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. See Are Distributions Taxable , later, for more information.

.

Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. 

These are qualified Education Expenses for QTP (529) plan funds:

Qualified Higher Education Expenses

These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time, defined later.

1. The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school.

   1. Tuition and fees.

   2. Books, supplies, and equipment.

2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.

3. Expenses for room and board must be incurred by students who are enrolled at least half-time (defined later).

   The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

   1. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

   2. The actual amount charged if the student is residing in housing owned or operated by the school.

   You may need to contact the eligible educational institution for qualified room and board costs.

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)

5. The expenses for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.

6. No more than $10,000 paid as principal or interest on qualified student loans of the designated beneficiary or the designated beneficiary’s sibling. A sibling includes a brother, sister, stepbrother, or stepsister. For purposes of the $10,000 limitation, amounts treated as a qualified higher education expense for the loans of a sibling are taken into account for the sibling and not for the designated beneficiary. You can’t deduct as interest on a student loan (see chapter 4) any amount paid from a distribution of earnings from a QTP after 2018 to the extent the earnings are treated as tax free because they were used to pay student loan interest.

Please refer to IRS Publication 970 for additional information on how to coordinate the use of different education distributions and scholarship for different expenses.

For additional information, please refer to the following link:

IRS Publication 970 Tax Benefits for Education

[Edited 04/08/2021|6:30 pm pst]