taxable 1099-Q issue

[keithbader]

When I entered my 1099-Q it is showing as taxable as other income and then giving me the unable to file error due to a new law.  However, my disbursements are not taxable as they were use for qualified expenses.  I am not sure why turbo tax is doing this.  I tried entering the 1099-Q first and then the 1099-T and then reversing the order, but it still shows it as taxable income.  I can not just omit the 1099-Q because the tuition expenses exceed the 1099-Q and I want to take the education deduction on the excess.  Why is TT always showing it as taxable and thus giving me the unable to file at this time error?   Very frustrating.   

[curlyfries38391]

I'm having the same issue and to be honest it's starting to piss me off. It keeps telling me to fix a line and then when I go and fix it, it tells me to print out my return and mail it.

[KarenM90]

I was unable to recreate this issue when I entered a 1099Q as well as a 1098T, so I recommend that you go back through both sections.  Pay close attention to the answers to the questions regarding if the 1099Q was used for qualified education expenses. ( There is a check box in there that says to check it if it was "not" used for qualified education expenses.  Be sure that box is not checked, if the funds were used exclusively for qualified education expenses.

If, as you mention, that the 1098T was greater than the 1099Q, you can leave off the 1099Q (although I don't recommend that, as it may generate an IRS notice.)  

If you do leave the 1099Q off, you can adjust the amount of tuition used to calculate the education credits at the very end of the interview process when you get to the screen that says:  "Choosing a larger education credit or deduction."  You can actually increase or decrease the amount calculated for the Education Credit on this screen.

[keithbader]

Thank you for your assistance. I found out what the problem was after messing around with it for quite a while. Apparently TurboTax was automatically making the 1099-q taxable even though I marked it as non-taxable because it gave me a larger tax refund by reporting the money as taxable and applying the full 1098-T as an education credit.  I just decreased the percentage of the education credit and although it decreased my tax return some at least I didn't get the error about the new tax law on taxable 1099 q and I could file of my return. Thanks.  

[bdmmyer]

Could you tell me where you changed the percentage?

Thanks

[KrisD15]

If the program offers you a "Maximize My Tax Break" and you click that, the program will allocate distributions, scholarships, and credits so that you get the best bottom line. 

To change that you need to go through the entire education interview again to a final screen that shows the allocation and allows you to change it. 

[RonaldB]

I have a slightly different issue.  My son is a freshman (started school in the fall of 2021).  Morgan Stanley manages my son's Bright Directions 529.  They counted a distribution on 1/4/22 for the Spring 2022 semester that had assets sold on 12/31/21 in the 1099-Q for 2021 year-end.   I told the representative that I did not authorize the assets to be sold on 12/31/21.  I told them the check needed to be received by 1/13/22.  This caused an issue where the school received the check directly from Morgan Stanley by 1/13/22 but they showed in the 1098-T the tuition for fall semester 2021 only.  Morgan Stanley said they could not correct the 1099-Q to show how much was actually disbursed in 2021.  This causes issues in Turbo Tax.  I don't know the best way to present the situation in Turbo Tax since all actual distributions were used for qualified expenses.  I don't know if I can show the 1099-Q, the way it should be or not report the 1099-Q in Turbo Tax.  I need help. 

[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 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! 

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." 

Technically, a 529 distribution must occur in the same year the expenses were paid.  This problem, of mismatched year end distributions, is fairly common.  Treat it as received and paid per your intentions and hope you can explain it away if you receive an IRS notice (unlikely).   You certainly meet  the intent of the 529 rules, if not the strict letter.  We haven't seen any reports, in this forum, of how that specific problem  has actually worked out. But, this is the usual advice. 

Do a better job on timing next year

[RonaldB]

Thanks for the feedback.  There were two distributions: One from the 529 directly to the school in August 2021 to cover the fall 2021 semester for tuition, room, board, and other school fees.  The next distribution from the 529 directly to the school was actually cut in January 2022 from the 529 directly to the school.  The January check covered the spring 2022 tuition, room, and board, and other school fees but the 1099-Q for 2021 included the check cut in January 2022 and the check cut in August 2021.  The 529 would not correct the 1099-Q despite the 529 site saying the check was cut on 1/4/22.  They said that due to me calling on 12/31/21 despite me telling them the school does not need the check until 1/14/22, they recorded it in 2021 based on the call.  Due to my and my spouse's income, we do not get to use the American Opportunity Tax Credit for education for my son.  If we don't report the 1099-Q, do we also not report the 1098-T?  

[KrisD15]

In the situation you describe, you would not enter the 1098-T into your TurboTax program since you say you are not eligible for an education credit. 

HOWEVER

If the student received more scholarships (or other aid such as employer assistance and yes, distributions from education savings accounts) than what was paid in expenses, the student would need to claim that excess as income. 

Tax forms only tell part of the story. As you found out with the distribution, they also can be misleading as well. 

You really need to keep a record of what was paid with what. the 1098-T reports tuition and fees, but there are usually books, supplies, laptops and internet service costs as well. 

Keep things straight by tax years. 

You can prepay up to the first three months of the following year. 

Distributions should be made in the same year as well, but you can treat them as a prepayment for the first three months or as a refund for the prior year if needed. In this case, be sure the expenses are not used twice and keep records, such as the student school account statements, with your tax file. 

[Hal_Al]

The 1099-Q and the  1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.  If you know everything works out, just don't enter them. 

You claim the tuition credit, or report scholarship income or claim the 529 distribution as not taxable, based on your own financial records, not the 1098-T. 

If you want TT to produce the worksheet, In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid, including what the 529 paid. 

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.