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?

Forum|Forum|7 years ago
June 3, 2019
4 replies
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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?

TurboTax Deluxe Windows

PopeyeTheSalior

Level 13

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

dmactaxAuthor

Level 2

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

dmactaxAuthor

Level 2

and yes I am claiming my son as a dependent

Hal_Al

Level 15

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.

Hal_Al

Level 15

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.

Hal_Al

Level 15

Thanks for your answer.

I thought the taxable amount would be: 1099-Q Block2 (Earnings) 3793/ Block 1 (Gross distribution) 10975 x 529 Nonqualifying distribution used for AOC 3764=1301.

Please advise.

As to the first of two other items mentioned on my last response, the incorrect information on 1098-T; I have found that the problem was that the college is sending information based on amounts billed and not amounts paid. For instance, the 2020 1098-T includes the gross tuition for the Spring 2021 semester in Block 1(5551). Block 1 should only include such tuition to the extent of applicable deemed paid in scholarships (4000). I will have to adjust the Form 1098-T for tax reporting.

As to the second item, re support for dependency purposes, the article I cited is the only information I have found that ties the support to the recipient. I am hoping there is underlying authoritative support that can be located.

Please advise.

Q. I thought the taxable amount would be: 1099-Q Block2 (Earnings) 3793/ Block 1 (Gross distribution) 10975 x 529 Nonqualifying distribution used for AOC 3764=1301. Please advise.

A. No. You're not following the logic of the calculation. You use the ratio of expenses to distribution not total earnings to total distributions. $3764 is not the nonqualifying distribution, or even a portion of it (it was just a number used in the math).

Q. I have found that the problem was that the college is sending information based on amounts billed and not amounts paid and reporting scholarships in following year.

A. Yep it's a common problem and you have to work around it. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. TT has provided some help: at the 1098-T screen, there is 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. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2020 expenses".

Q. As to the 529 money being support for dependency purposes, the article I cited is the only information I have found that ties the support to the recipient. I am hoping there is underlying authoritative support that can be located.

A. You accurately described the situation. There is no IRS guidance, at this time. The majority of opinions is that it is parental support, regardless of who is the "recipient" (you found one of the minority opinions) If you are going to try to file, on the basis of it's student support, your case has a better chance if the student was the recipient.