Why are the Adjusted Qualified Higher Education Expenses on my 1099-Q worksheet being reduced by $10,000 from the value on my 1098-T?

[Anita01]

When you enter the 1098-T, you are asked how much of the education expenses you want to allocate to taking education credits.  You can only use expenses for taking an education credit or making your 199-Q nontaxable.  You ca't use the same expenses for both.  Possibly you entered entered $10,000, or left it blank to default to all expenses so that was allocated to education credits.

to change it,enter the words education expenses in Search and click the Jump To.

[harterpk]

I see the same 10,000 difference.   My tuition expenses for my daughter are higher than the 529 distribution, but I'm being taxed on part of the distribution.

For example, the 1098-T shows $25,000 in box 1, and that's reflected in the form in TurboTax.  However,  while the 1099-Q worksheet in TurboTax shows the correct distribution information, e.g. $23,000, down below it shows $15,000 on line 2b under QTB Computation of Taxable Distribution, which results in including some of my supposedly tax free distribution in my income.

I don't see any question about "how much of the education expenses you want to allocate to taking education credits." when I enter the 1098-T.

[harterpk]

Searched again, and managed to find to question about "how much of the education expenses you want to allocate to taking education credits."  It's not in the 1098-T form.  It's actually under the "Education Information" section at the bottom of the page "Here's your Education Summary."  

This actually seems to make some sense now.....   

[NCperson]

are you eligible for AOTC - that trips a lot of people up when trying to understand why they are being taxed on a portion of their 1099Q / box 2 distributions.

[Carl]

For others who may come across this thread, the emphasis is on whats bold italicized below.

 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.

[harterpk]

Thanks NCperson.    Turns out that TT does apparently think that I'm eligible for AOC this time around.  In previous years my 1098-T was directly applied to my 1099-Q "income" with no diversion.  

It's surprising that TT automatically makes the "default" assumption of diverting to credits of $10,000 WITHOUT ASKING, since the max that can be used for AOC is $4,000.   At least now I know where I can change it.

[NCperson]

@harterpk - TT automatically does it because credits are more valuable than deductions. 

In the 'worst case' scenanario, AOTC would create $2500 of tax relief while even if Box 1= Box 2 on the 1099Q, the most it would cost you is $4000 of deductions at the highest rate of 37% or $1480 of tax relief, hence it will always default to using AOTC as part of its optimization.  

[harterpk]

Credits vs. deductions is all clear to me.   My question was why TT presumed to remove $10,000 from my 1098-T entry, when it could only use (at most) $4,000 to generate the AOC credit.  The net result was that it calculated the credit, but added several thousand back to my income, and I would have paid tax on it.

When I went  through the interview, TT did not ask me about diverting the money (or how much), but just did it.  Maybe it would have "fixed this" if I had gone through to auto-optimize, but I got confused by the initial 10K and went hunting before going further.

[KathrynG3]

Yes, TurboTax is designed to automatically optimize your education credit. However, it was very god to get to the education information yourself and indicate you only needed $4,000 of the education expenses to be considered for the credit.

The reason $10,000 is chosen for the maximum eligible education expenses to allocate to an education credit is because of the Lifetime Learning Credit. The Lifetime Learning Credit is 20% of the first $10,000 of qualified educational expenses.

Typically, if there is an option, tax software will default to the most conservative value in order to protect the taxpayer from an incorrect position. In your case, however, the correct tax position is for the American Opportunity Tax Credit which only requires $4,000 of qualified education expenses in order to calculate to the maximum allowable credit of $2,500.

[deleske]

harterpk, I have been looking but can't find the section to which you refer.  Any help would be appreciated.  Thank you!

[KrisD15]

Go through all the sections of the education interviews.

[harterpk]

The opportunity to specify how much of your educational expenses you want to apply to trying for tax credits is under Deductions & Credits -> Education ->  Expenses and Scholarships (Form 1098-T).  Near the end of the inteview is a page entitled "Choosing a larger education credit or deduction."   You can also get there from the page "Here's Your Education Summary" if you click Edit under "Education Information"

Things seem a little different now from when I went through, but this should help.

[hotdogbun]

This thread was very helpful!  I'd definitely consider this a bug in TT's tax calculation algorithm and checking routines.  Without this thread buried down here, my QHEE would be $10k less and I'd be paying $1000's in more tax.

Wonder how many people got tripped up by this & overpaid their taxes... 

[jdpone]

THANK YOU for this thread. Seems to still be a bug this year. I had to go into the form and override the $10K.