Do I need to file 1099-Q if the 529 distribution was for qualified education expenses?

[maglib]

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p970.pdf">https://www.irs.gov/pub/irs-pdf/p970.pdf</a> see page 5 TIP and onward with some examples of creating income. Tax-Free Scholarships and Fellowship Grants A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the
educational assistance in income in the year it is received. See examples in Coordination with Pell grants and other
scholarships in chapter 2 and chapter 3

[taochen1]

Thank you all for the really helpful discussion.  I've got a different but related question: My child's last year of college qualified education expenses were paid for by withdrawal from my 529 plan that has the child as the beneficiary.  In 2017, the child finished one last class and started a job in a different city, so was not a full time student in that year and is not my dependent any more. The 1099Q for the withdrawal is in my (the parent's) name and I entered my kid's qualified expenses under the "non-dependent student" section in TurboTax for my return.  Should the 1098T (in the child's name) be entered in either of the two returns (mine or my child's)?
Thanks in advance,

[Carl]

@maglib  I say the non-dependent student claims the 1098-T if that is who the 1098-T is for. Agree?

[taochen1]

Thank you, Carl.  However, the tuition paid to the college and shown on the 1098T is part of the qualified education expenses that I had to report on my return so as to justify the 529 withdrawal.  If my kid then includes the same tuition on 1098T again, it's it double dipping?

[pmeaux123]

You file the 1098T if you want tax credits or to substantiate 529 withdrawals.  

Based on the way Turbo tax handled the 1098T questions, I included it on my tax return as well as my dependent son's tax return.  I don't think it would be considered double dipping unless you're getting double benefits, which we did not.  In my situation my dependent son has full scholarship with part of it taxable (room and board).  The taxable portion exceeds his standard deduction so we had to pay tax on it based on our tax rate (that didn't make me very happy!)   I also had a 529 withdrawal for him for small additional expense.  I reported the 1098T on my return when TurboTax asked for it and included the additional expense so I would not pay tax on earnings related to 529 withdrawal.  My son had to report the 1098T due to the fact that the scholarship exceeded qualified expenses.  The taxable portion of the scholarship is considered his unearned income and taxed at the parent's rate.  TurboTax walks you through this and completes Form 8615.

[Carl]

Box 1 of the 1098-T shows what qualified education expenses were paid. It has nothing to do with where the money came from that paid those expenses. Box 5 of the 1098-T shows 3rd party funds received by the school on the student's behalf. That would be things like scholarships and grants. Since 529 funds are paid directly to the beneficiary recipient of those funds, box 5 of the 1098-T does not include what is reported on the 1099-Q. So there is no conflict. " If my kid then includes the same tuition on 1098T again, it's it double dipping? " Yes, it most absolutely is double-dipping. You can't do that, as you know.

[maglib]

the person who claims the dependent claims the 1098-T and the 1099-Q while it came to you, it should have a box that indicates it's the students.    Note the IRS only sees the net reported.  They don't see on your return the 1098-T nor the 1099-Q.  Bottom line is the person who claims the dependent can only claim the education expenses. So in a perfect world the education expenses claimed are bottom line, are funds paid with TAXABLE income.  So since your student is claiming themself, they claim it all.  Do note that to be eligible for the refundable portion of the tax credits, they must have earned income that pays over half their own support.  Otherwise, they can only reduce their tax liability.  And any excess scholarships, grants, room & board is 100% always claimed by the student.The 1099Q should be to the student or if to you, then Box 6. Designated Beneficiary Checked box if the recipient is not the designated beneficiary.

1098-T and 1099-Q are informational only.  they are only required to be reported to the extent you are taking tax credits for education or the 1099Q is in excess of qualified education expenses.  They are informational, the fact that some are accrual is also an issue. You only get to claim the amounts actually paid.   ONLY the person claiming the dependent can get education credits.  The student can have taxable income created on their return regardless of who claims them.   Simplest way to do the above in TT is to report both on person claiming the dependent.  If the parent is, TT will calculate any income needing to be reported on the students return which can be entered as a scholarship entry with no education expenses.  If the student is claiming themself, the program will calculate for you.  The only optional area of flexiblity is the amount used for education credits on the last screen, that amount is often defaulted to $10k, normally the best amount is $4k, but play with it, to see best outcome.

Bottom line, while you didn't report it correctly, the taxable income ended on your students return, and you did not get education credits.  Your return should show nothing for education in the end, only the students return should.  Yes it's all taxable income and subject to kiddie tax.  If you had reported the 1099Q on your childs return, you may have ended in a better scenario as only the earnings would have been taxed, not the whole amount.  You may want to see if reporting the whole thing on your childs return would have created a better tax scenario.... The 529 would have gone towards the room & board is why it would have been better and less taxable income would have been created as they would have entered all the education expenses..

[pmeaux123]

Not sure who your comment is directed to, but we do not get education credits due to income limitations. Also, the 1099Q and 1098T are both furnished to the IRS so I feel safer filing (or having my son file) everything related to it - I don't want any letters from the IRS. And not sure what you are saying about dependent reporting 1099Q. It is in our name with him as beneficiary. We reported it with expenses against it and paid no tax related to it.

[maglib]

@pmeaux123 If you don't get education credits due to income limitations, there is another option. You do not claim your children as dependents and then report none of the education credits nor 1099Q federally, most states allow you to add them back as long as they are valid dependents, you just choose not to claim them for credit reasons. i do this with my sons return. Then the student is allowed to file a return and get the education credits to the extent of their tax liability, they must say that they can be claimed by someone else but won't be when they file. They report the 1099Q, the w-2 and the 1098-T on their returns then and their tax liability can be reduced up to the AOTC. This may/may not be your better option depending on the value of the loss of their exemptions. Many high income tax payers find this to be the most lucrative option.

[taochen1]

My kid cannot be claimed as my dependent for 2017 since her income was too high after finishing college in the first quarter of 2017.  Not knowing she was below half-time as a student in that quarter, I had withdrawn from the 529 (with her as beneficiary) money to pay for her room and board.  After entering the 1099Q for this withdrawal into TubroTax, it treats all her expenses as qualified, even though IRS Form 970 is clear the room and board portion is not. But that's an obvious mistake by TT.  If I don't enter the room and board expenses, then TT will increase my tax accordingly (because there's not enough qualified education to offset the withdrawal).
The withdrawal was in a check paid to me (the parent) so the 1099Q shows me as the recipient and has box 6 ("recipient is not the designated beneficiary") checked.  But do note if the 1099Q was only used to pay qualified education expenses then it does not need to be reported at all. Only amounts in excess of qualified education payments in 2017 must be reported.
My question: Is there a way to report the 1099Q on my daughter's return?  Because her tax rate is much lower.

[maglib]

@taochen1
room & board is qualified education expense for 1099Q.  The definition of qualified education expense for all tax credits and deductions is different. Why tax laws are so complicated.
Your daughter should be reporting the 1099Q. While you receive it, it specifies that your child was the beneficiary in box 6 I believe (sorry I can't recall which box right now) so if she was not your dependent, she must report it on her return.
You can not claim any education expenses on your return if she is not your dependent.

[Carl]

"My kid cannot be claimed as my dependent for 2017 since her income was too high after finishing college in the first quarter of 2017."
If the student was under the age of 24 on Dec 31 of the tax year, then their income does not matter. They could earn a million dollars and still qualify as your dependent.
"Not knowing she was below half-time as a student in that quarter,"
Yep, that sucks. If the student had not graduated in may and was a full time student for any other semester that started in the tax year, this would not be a problem then. That is what makes the requirement to claim the student as a dependent change from the "dependent child" rules to the "dependent relative" rules. So that makes the student's taxable income matter.
Therefore since you do not qualify to claim the student on your tax return, you also can't claim any of the education stuff on your return for that specific student. The student will claim it all on their own tax return.
But as I pointed out in my original answer above, it takes 5 calendar years to get that 4 year degree. That's why it's so important in the student's senior year, to pay all of those qualified expenses for the fall semester, BEFORE the end of the spring semester so you can claim those expenses and credits in what would be the 4th calendar year of the student's last year in college.

[Sarahmom]

Yup.  I am finding that Turbo tax does not seem to know what to do with the 529 distributions.  We ended up having to do amended returns for 3 years. We did the forms in the order that the program prompted us to and ended up paying over $4000 in taxes we shouldn't have. The payments were e transferred to our account to pay to the university.  Every penny went to the university and I have all the receipts. We had the forms from the university that we paid more than our 529 funds in qualified expenses. But Turbotax said our income level disqualified us from claiming any educational deductions and counted it all as income. That's not how a 529 works. I have used Turbotax for 16 years.  I will not be this year. I really wish they would get this figured out. I'm on parent forums for both my kid's universities.  Many parents talk about this problem with the 529 and Turbotax. 

[Sarahmom]

Where is this thread please!

[Hal_Al]

@Sarahmom  -  The simple solution is just don't enter the 1099-Q.   If the distribution, from the qualified tuition plan, was totally spent on qualified educational expenses, you do not need to report the 1099-Q as income. So, just don't enter the 1099-Q into TurboTax (TT). When TT determines that none of it is taxable, there is no entry made anywhere on the IRS tax forms. The only paper work is a 1099-Q worksheet that is not sent to the IRS, but might come in handy if you are audited.

Here's where the problem/error is in TT: 

TurboTax assumes you will claim a Tuition credit, if you are eligible. So it reduces the amount used for the earnings exclusion, on the 1099-Q, for the amount used for the credit. You are not allowed to double dip.

Since the tuition credit is more generous than the earnings exclusion, that is the best way for most people to file.

If you some reason, you are not eligible for the tuition credit, or do not want to claim it; go through the education section again. When you get to the screen that says “Here’s your Education Summary”.  Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change/delete it.