TurboTax says 1099-Q Income Taxable, but isn't Adding It On

[VitaminSoup]

TurboTax is saying my 1099-Q Earnings are taxable, but they are *NOT* adding them on to my income,. They still give my children an American Opportunity Credit (although the credit is less than the Basis--the part I originally paid in and already paid taxes on.) I've already paid Turbotax and am ready to file, but I am concerned this is not correct, because my refund is almost twice what it was last year (having 2 kids in college is the difference in how I'm filing.) 

1) Am I allowed to take the American Opportunity Credit, since the credit is less than the Basis, even though the tuition was completely paid for via a pre-paid tuition plan? 

2) Why is Turbo Tax saying the Earnings on the pre-paid tuition plan is taxable, but then not actually adding it on as income at any point?

3) One child received a scholarship, which gave him a refund from the college from the pre-paid tuition. Everything I read says this refund should be taxable, and I marked on the Turbo Tax form that the scholarship was *not* used to pay college expenses, but it is also not showing up as income.

Thank you to anyone who can help me understand this better. 

And to clarify, neither of my children are filing a tax return, they are both dependents on my tax return, so my above questions refer to my tax return. 

[NCperson]

not following all your questions but will answer what I can and how I can, 

#1) what do you mean by the 'basis' - are you referring to a box on the 1099Q?  the AOTC has nothing to do with the 1099Q.  If you are filing joint and your income is less than $160,000, you are eligible for AOTC.  TT should calculate that automatically (assuming you answered all the questions correctly)

#2) did you add in things like Room and Board, non-required books? if these 'qualified higher educational' expenses exceed the Box 1 distribution, then the Box 2 earning are NOT taxable.  I think the taxable earnings show up on Schedule 1. 

#3) that goes on your child's tax return - not yours.  That is why you don't see it.  But it is a separate question whether your child is required to file in any event.  if their earning income (and this money would be considered earned income) is less than the lessor of earned income plus $350 or $12,000 AND there are no withholding from working, there is no requirement for the child to file a return, 

[VitaminSoup]

Hi! Thank you for your reply!

1) "Basis"--that is Box 3 on my 1099-Q, this is the amount that I actually paid into the 529 account (I paid taxes on it at the time, as it was not tax deductible.)

2) No, I did not add on any expenses, only the tuition off the 1098-T was used. Both students lived at home, and yes while they did buy books, I didn't keep a record of that, so didn't include it. But yes, the tuition was greater than the Box 2 1099-Q earnings. 

3) Ah, I see. The scholarship would count as my students earning and would go on his tax return. Since the scholarship is $1500 (less than $12,000) then it sounds like he would not have to file. 

I guess my concern is that I'm getting the American Education Credit, but I didn't pay taxes on the Box 2 earnings....so is it saying that because the Credit was less than the amount in Box 3 that I did pay taxes on in the past, that is why I can claim the credit? 

[NCperson]

please post back the 1098T amounts in Box 1 and Box 5 as well as the Box 1 amount on the 1099Q and I can explain the math.  

[VitaminSoup]

please post back the 1098T amounts in Box 1 and Box 5 as well as the Box 1 amount on the 1099Q and I can explain the math.  
Child 1:
1098T box 1 $13495 box 5 $1500
1099Q box 1 $6940

Child 2:
1098T box 1 $13495 box 5 $0
1099Q box 1 $14200

[NCperson · Accepted solution]

Child 1: the net difference on the 1098T box 1 and Box 5 is $11,995,

$4000 of that is consumed to yield the $2500 AOTC credit (look at the form and you can see how the IRS uses $4000 to get to $2500)

that leaves $7995,

since 7995 is greater than 6940, nothing in box 2 is taxable.  There is 1055 remaining

Child 2: the net difference on the 1098T box 1 and Box 5 is $13,495,

$4000 of that is consumed to yield the $2500 AOTC credit (look at the form and you can see how the IRS uses $4000 to get to $2500)

that leaves $9495,

add in the 1055 unused from Child 1 so we have 10550

that means that 3650 of the 14200 distribution wasn't needed and therefore 25.7% (3650 / 14200) of the Box 2 earnings is taxable. 

you weren't clear on whose social security number was on the 1099Q.  If that is your son's, then the 1099Q and the related taxable earnings goes on HIS return. 

make sense? 

[VitaminSoup]

Yes, I think I finally understand! Both the 1098T's and the 1099Q's have my children's names on them, not mine. So the taxable income would go on their income tax form, not mine. 

Thank you so much! Now I feel confident that my statement is correct. 

So, my follow-up question, it looks like my children would need to file a tax return, because the income from the 1099Q would be considered interest income and not net income? 

[NCperson]

NO!

the taxable portion is considered "earned" income, so if they didn't have any federal tax withheld AND they had less than $350 of dividends / interest / capital gains (unearned income) AND their total income is less than $12,200, there is no need to file