Do you have to enter 1098-T and 1099-Q if you paid tuition with 529 distributions and therefore, I don't believe you can take Tuition tax credits?

[dmactax]

My son's  tuition was paid by two 529 distributions in 2017, one from my mom's account for him and one from my account for him.  I entered all the 1098-T info and my 1099-q into my return on turbo tax and my mom's 1099-q info on her return.  My mom's return in fine but on mine, Turbo Tax is giving me the American Opportunity credit for $2500, which I'm not sure I am entitled to since the 529 distributions cover the tuition 100%.  How do I enter correctly?  Am I missing something?

[LinaJ2018]

Are the 1099-Q reported in your son's name and SSN?  Are you claiming your son as your dependent?

[dmactax]

Thank you for your prompt response. The 1099-Q is reported in my name and SSn and my mom's name and SSN as the owner of the 529s

[dmactax]

and yes I am claiming my son as a dependent

[Hal_Al]

TurboTax is doing it correctly.  At least, the part about giving you the  American Opportunity credit for $2500. That may result in some of your 1099-Q being taxable. It's best explained by example. 

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q 

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

Full explanation follows.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the QTP. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

**Alternatively; 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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. It will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.

[dmactax]

Thank you for your very detailed answer.  I think this would be more straight forward if I had paid the entire amount of his tuition from my 529.  Does the fact that my mom's 529 paid the other half of his tuition come into play?  She received a 1099-Q and I entered it on her taxes.  Should that be on my taxes instead since my son is the beneficiary?

[Hal_Al]

When doing the math (like the example above) you have to take into account the grandmother's 529 too. It doesn't matter that the beneficiary is your dependent and not grandma's.

Expanding the example: your 1099-Q was for $2500 and grandma's was also for $2500. We know that $240 must be reported as taxable income. You could each report $120 on your respective returns. Or you could report the entire $240 and grandma none. You may split it any way you want, so long as you don't report more than your box 2 amount as taxable income.

[dlhdch]

When using Turbo Tax Deluxe in situation similar to the  above example, how is the Form 1099Q and 1098T information entered in the program, and on which return?

I am a grandparent account owner and the beneficiary grandson will be considered a dependent of my daughter.

The 1099Q was sent to me and the distribution was listed as to other than the beneficiary. The 1098T was sent to my grandson. As a family group, we would like to take advantage of the American Opportunity Credit or LLC, if eligible. The 529 withdrawals do not exceed the qualifying education expenses, if we choose to forgo the AOC or LLC.

How would this activity be entered in the Turbo Tax Deluxe Model?

[Hal_Al]

As explained above,  you have to coordinate the allocation of expenses with the parent. The parent should only need to use $4000 of tuition to claim the AOC. The rest of the expenses are available to you to use against the 1099-Q.

After deducting $4000, if there is still enough expense left to cover the 1099-Q, you can skip entering it all.

Provide the following info for more specific help:

• Box 1 of the 1098-T
• box 5 of the 1098-T
• Does box 5 include any of the 529 plan payments (it should not)
• Box 1 of the 1099-Q
• Box 2 of the 1098-Q
• Room & board paid. If student lives off campus, what is school's R&B charge. If student lives at home what is schools meal plan charge
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers, internet service

[dchdlh]

Box 1 1098-T : $11,247. I think this amount has to be adjusted, as it includes tuition for the spring semester of the following year (2021). Using the spring semester of 2020 in its place, the figure would be $11,247. 

Box 2 1098-T: $10,450. Using the logic for adjusting Box 1, this figure would be $10,700.

Box 5 1098-T: Does not include 529 payments.

Box 1 1099-Q: $10,975

Box 2 1099-Q: $3,794

Room and Board Paid: $9,861

Other QE not included in Box 1 1098-T: $768

According to my calculations, if all of the scholarships were applied to Tuition,  $1,294 would be available for the AOC ($11,227-$10,700+$768).  I have verified that at least $2,450 of scholarships is unrestricted. Applying that amount to room and board, would result in $3,744 available for the AOC ($1,294+$2,450) and $2,450 in taxable scholarships for the beneficiary.

Any information you can furnish on proper entries into to Turbo Tax would be appreciated.

I see the end result as the account owner (distributee) being taxed on the earning portion of the nonqualifying distribution (assuming $3,744 used for AOC = $3,744x($3,794/$10,975). As to the parents return, it appears the $3,744 would be available for the AOC subject to MAGI limitations and other requirements. It appears the beneficiary's return will have $2,450 in taxable scholarships and potentially be subject the Kiddie Tax.

Please advise.

[Hal_Al]

On the parents return enter the 1098-T with $3744 in box 1 and nothing in box 5. Enter no other numbers.

On the student's return, enter the 1098-T with $2450 in box 5 and nothing in box 1. Enter no other numbers.

On your return, enter the 1099-Q, exactly as received. Follow the interview. You will have to enter the student’s name. All the numbers will be entered at the 1099-Q section  (not the education expenses section) because the beneficiary is not your dependent.

When you get to the boxes, enter $11247 for tuition (this number is arbitrary and is entered to establish a penalty exception). Enter $9882 (see below for why) for room & board (or split 9882 between R&B and books). Enter $7503 at  Tax free assistance and $3744 at other adjustments (7503+3744=11247).

I come up with:  (1093*/10,975)x3794 = $378 as the taxable amount of distribution.

*11247+9861+768=21,876 Total expenses

21876-(10,700-2450)=13,626 not covered by tax free scholarship

13626-3744 (used for credit) =9882 expenses available for 529 distribution

10975-9882=1093 of the distribution not covered by expenses

[dchdlh]

I am following most of your answer, but it seems to me the 1093 distribution not covered by expenses may need to be recomputed, assuming this amount assuming this amount is meant to be the Qualifying Educational Expenses (Tuition and related expenses-QEE) used for the AOC.

I agree with the total expenses and the expenses not covered by tax-free scholarships. The resulting amount of 13626 consists of room and board of 9861 and tuition and related fees of 3744 ([social security number removed]-768-1 rounding).  

Applying the 2450 taxable scholarships to R&B, results in R&B 7411 (9861-2450) QEE for 529 purposes and 3744 of tuition and related expenses QEE for 529 purposes = the 1099Q withdrawals of 10975 (7411+3744).

The 3744 would then be available for the AOC as QEE foe AOC purposes and considered as a nonqualified distribution for 529 purposes.  

Assuming this is correct, would it change any of your answers as to posting in Turbo Tax Deluxe?

A second issue I would like to bring up is the correct application of numbers included in 1098-T reporting.  In the past, I have not reported any 1099-Q or 1098-T items on related returns, as it appeared the 529 withdrawals equaled the QEE for 529 purposes. As I have decided to pursue the AOC, the reported amounts have become relevant.  Even if I do not pursue the AOC, I may need some clarification.

IRS Publication 970 says QEE for AOC purposes are made in the current year for the beginning in the current year or for academic periods beginning in the first three months of the following year.  In my case above, (the sophomore year) due to "advanced enrollment", the 1098-T for 2020 included in Block 1 (Payments received for qualified tuition and related expenses) the tuition for the academic period beginning in the following calendar year (2021). Block 5 included in Scholarships and Grants certain scholarships applicable to the amounts in Block 1.  As to a similar "advance enrollment" for Spring 2020, amounts reported 2021 Form 1098-T, included only certain scholarships awarded in 2020 and out-of-pocket expenses paid in 2020 for R&B and required materials when purchased thru the college.

In reviewing, the related Forms 1099-Q and 1098-T for the beneficiaries initial freshman semester. Due to "advanced enrollment" amounts reported on the 1098-T, far exceeded what would have thought to have been qualifying expenses for 529 purposes (out-of-pocket expenses  for the initial Fall semester of the student).

The college is apparently following Form 1098-T guidelines, but I am confused as to how to treat the amounts furnished, principally due to "advanced enrollment amounts" as to amounts available when making withdrawals of QEE from the 529 plan and for AOC purposes.

By way of example, the 2020 1098-Q Block 1 included the Spring  2020 tuition and fees as to the residual of advance enrollment 1281 ( 5531 Tuition and related fees less 4250 related scholarships). As to the Fall 2020 semester it included 5696 Tuition and (due to advance enrollment) included 5551 related to spring 2021 tuition. Total in Block 1 was 11,247 (1281+5696+5551).

Block 5 included for the Spring 2020 semester a 1225 scholarship awarded in Spring 2020, plus out-of-pocket qualifying 529 expenses for Spring 2020. As to the Fall 2020 semester, Block 5 included Fall 2020  related scholarships of 5225+ related known out-of-pocket QEE for 529 purposes. As to the Block 5 for the Spring 2021, due to advanced enrollment , included 4000 in scholarships

for 

In examining the 1098-T for the students freshman year, 

[dchdlh]

Re my posting of 2/24/21. I had presented two issues.

This posting was a response to a posting by Hal-Al (Level 15) posted in a new reply in Education on February 23, 2021 11:46 AM. 

Please only reply to the first issue.  Also, as to the first issue, the third sentence explaining the make-up of the 13626 as to tuition and related fees of 3764 should have had in parentheses ([social security number removed]+768-1 rounding).

Note, I had actually used 11227 in my original calculations which results in a 20 difference thru out.

As to the second issue and a typo in the first issue, I had a computer malfunction which occurred partially into the second issue.  Apparently, all the extensive editing, rewriting, etc. that occurred after the malfunction could not be authenticated and did not post.  As a result, the second issue remains expressed in an unintelligible form.

Please ignore the second issue in any reply.  I will attempt to present that issue in an intelligible manner after the first issue is resolved.

I apologize deeply for any inconvenience and thank you for your patience.

Again, any help would be appreciated.

Again, any help on the first issue would be appreciated.

[Hal_Al]

You're trying too hard to match money sources with specific expenses.  You can just use totals as long as there is enough QEE (tuition, fees, books) for  Tax free scholarship and AOTC. We did that; that’s why AOTC is $3744 not the full $4000.  

 " the 1093 distribution not covered by expenses may need to be recomputed, assuming this amount  is meant to be the Qualifying Educational Expenses (Tuition and related expenses-QEE) used for the AOC".       No. It’s simply the part not covered by any QEE or room & board. That is, all the expenses have already been used

 "Applying the 2450 taxable scholarships to R&B".       No. The taxable scholarship is not applied to anything. Consider it put in the bank or spent on a trip to Disneyworld. It’s taxable income and can be used for anything.

The typo  means that you can use $3764 for AOTC, instead of $3744.  I think I did use 12,247 in coming up with 1093 (but did not use 3764). So 1093 becomes 1113 and 9882 become 9862 (If you decide to change them)

______________________________________________________________________________________

As to the 2^nd issue, the taxpayer claims taxes based on his own financial records not the 1098-T. Money spent in 2020 for Spring 2021 counts for 2020

[dchdlh]

Thanks for the update.

As to 1113 amount, is there any tax significance to that amount?

As to 3764, was trying to tie-in to the QEE under 529 by showing the portion of the R&B reimbursable under the 529 was net of the amount of taxable scholarship used to pay such amount 7482 (9882-2450) and when added to the 3764 should equal the QEE payable by the 529 plan.

A couple of other comments. The information on the Form 1098-T's I am working with is obviously inaccurate. For example, the 2019 Form 1098-T for the freshmen first semester (Fall-2019) includes in Block 1 (Payments received for qualified tuition and related expenses) the gross tuition charge for the Spring  semester of the following year (2020). Block 5 includes certain scholarships considered applied to the Spring semester tuition.  The college's logic is the the student has advanced enrolled for Spring semester and certain scholarships awarded in during the Spring semester applicable to that tuition should be should be included in Block 5.

The Form 1098-T for 2020 the follows this pattern as to the 2021 Spring semester. However, as to the Spring 2020 Tuition, it includes in Block1 the net tuition from Spring 2020. Thus, when added together Blocks 1 for 2019 and 2020 include the net for Spring 2020 twice.

As applied to the current situation, Block 1 of the 2019 1098-T included 5531 in gross tuition for the Spring semester 2020, and as to such semester included 4250 in scholarships. As to the 2020 1098-T and applicable to the Spring 2020 semester, Block 1 included the tuition net of scholarships applied on the 2019 1098-T 1281 (5531-4250); thus when viewing Block 1's for 2019 and 2020, double reporting the 1281.

Reporting in the 2020 1098-T Block 1 included 5551 gross tuition for the Spring 2021 semester and Block 5 included certain scholarships related to that tuition of 4000.

A question arises as to how to adjust this inaccurate  Form 1098-T for tax reporting.  Assuming the certain scholarships for the Spring semesters (e.g. the 4000 for Spring 2021 1098-T reporting is proper reporting - prepayment counted as 2020 activity: at a minimum, it would appear only that related amount should have been included on Block 1 1098-T reporting for purposes (4000).

In the numbers I reported earlier, for 2020 reporting, I attempted to solve this problem by adjusting 1098-T amounts by removing the Spring 2021 amounts (5551 tuition and 4000 scholarships) and using for Spring 2020 amounts 5531 tuition and 4250 scholarships.

Would the adjustments I used be proper, and if not, what should have been done?

I have a comment on another issue, re the dependency test for support. From prior posts I see you are a proponent of the account owner (versus the beneficiary) being treated as furnishing support on 529 plan distributions, especially when the account owner is the recipient of the distribution.

I found an article titled, Is Your College Student Still Your Dependent? 529 Distributions and the Support Test.

It was apparently published by F.J. Koelle & Assoc. CPA's.  There take was  that it depended on the recipient- to account owner = account owner support, to beneficiary= beneficiary support. There were no authoritative references in the report. They have a blog on facebook, but I'm not sure if anyone asked about authoritative sources.  At least, their opinion matches yours, but authoritative references would have been more convincing.