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?

[Hal_Al]

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

A.  $1133 is the portion of distribution that is not covered by expenses. TT will calculate  this number and use it to calculate the portion of the distribution that is taxable*. But, you don't need it.  I was trying to give you an idea of what the TT output would be.

All you need to enter is $8882  (or $8862 correcting for the typo) of room, board, and book expenses.

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

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

13626-3764 (used for credit) =9862 expenses available for 529 distribution

10975-9862=$1133 is the portion of distribution that is not covered by expenses. 

  (1133 /10,975) = 10.32% the percentage that is not tax free

This means that 10.32 % of the earnings in box 2 is taxable.  0.1032 x  3794 = $392 This is the amount that TT will enter on line 8 of Schedule 1 as taxable income.

[dchdlh]

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.

[Hal_Al]

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.

[dchdlh]

I am on board with your calculation of $392 as the taxable portion of earning attributable to the $1133 portion of the distribution not covered by expenses. In effect, the taxable portion of the scholarships increases the QEE.

At the time of the withdrawals I had not considered any of the scholarships as taxable.

As to the taxable scholarships of $2450, earlier in our string you had advised to enter, on student's return, the 1098-T with $2450 in box 5 and nothing in box 1 (and enter no other numbers).  I could not figure out how to enter 1098-T information specifically in Turbo Tax.  I entered the $2450 in the Student Information Worksheet, Part V, Line 4. This was scholarships required to be used for room and board (the $2450 was not). The $2450 ended up in line 1 of the 1040 with a SCH description, along with $5000 in W-2 income. 

The $2450 was included in the Standard Deduction also. I noted in the Less Common section of Wages and Income, Childs Income Under Age 24 indicated no Kiddie Tax form (8615) was required because investment income was less than $2200. I was under the impression that taxable scholarships were considered unearned income for Kiddie tax purposes. The Form 8615 is titled "Tax for Certain Children Who Have Unearned Income.

My question is did I enter the $2450 in the right place, and did I end up with the proper result re Form 8615?

Please advise.

[JoannaB2]

A 529 plan is a college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan. 

If you received a 1098-T from the higher educational instution, you may claim AOTC even though the tuition was paid through 529 savings plan  The plan that your mother set up was a prepaid tuition plan wherein the tuuition paid to the school,to get a degree or diploma, can be used to claim AOTC. 

[Hal_Al]

Q. Did I enter the $2450 in the right place?

A.  Yes, the $2450 ended up in line 1 of the 1040 with a SCH description.

Q. Did I end up with the proper result re Form 8615?

A.  Yes. The result is correct.  But, you are correct that scholarship income is unearned income for the kiddie tax.  But, it is treated as "earned income" for purposes of the calculation of a dependent's standard deduction (his earned income + $350).  So, his scholarship is wiped out by the standard deduction and never becomes taxable income.

[dchdlh]

I found the Form 1098-T worksheet in the "Forms" mode and was able to enter Block 1 (0) and Block 5 (2450) , as originally suggested.  I linked the 1098-T worksheet to the Student worksheet, which carried the 2450 to line 1- Form 1040 with SCH. This provided the proper result for earned income and the standard deduction, and as suggested resulted in no Kiddie tax.

The only thing that did not appear to flow properly is that I had to override Part 1 line 1 of the Form 8615 to include the 2450 in unearned income; otherwise the return would not have included the Form 8615.

[dlhdch]

When using Turbo Tax Deluxe 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.  I believe  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?

The following info is supplied for more specific help:

• Box 1 of the 1098-T: $5200
• box 5 of the 1098-T: $2100
• Does box 5 include any of the 529 plan payments (it should not): I'm not sure- see additional info below
• Box 1 of the 1099-Q: $5500
• Box 2 of the 1098-Q: $1800
• 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: Student goes to a community college (CC) and lives at home. I don't believe the college has a R&B charge.
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers, internet service: $300
• Additional Info: The $5200 in Box 1 of the 1098-T was paid to CC and reimbursed by 529 withdrawals.  Subsequently, CC received the scholarship proceeds of $2100 from scholarship sponsor and forwarded them to the student. This amount was promptly sent to the 529 Plan. The gross billing, followed by forwarding schlorship proceeds upon receipt, is the default position of CC. Alternatively, the student could request CC bill on net basis. The default position of CC implies that the scholarship proceeds are unrestricted, even though proceeds are generally applied by CC to tuition and related expenses. Information found on Financial Solutions for Families website implied the particular scholarship proceeds could be treated as unrestriced depending on how the family chooses to use the proceeds.

[Hal_Al]

"$2100 from scholarship sponsor was forwarded to the student. This amount was promptly sent to the 529 Plan". 

What does that mean?  Was the $2100 treated as rollover/return of distribution? Was the 1099-Q adjusted for that? Or did the plan just treat it as a contribution? The following ignores that issue:

Q. When using Turbo Tax Deluxe 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.

A. Do not enter the 1099-Q on your (or anyone else's) tax return.   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*. $5500 (box 1 1099-Q) is probably a reasonable amount  for a full year of room & board (check a local college published rates for justification). 

On the parent's return, they enter the 1098-T  to claim the American Opportunity Credit (AOC).  For simplicity they should enter it with $4000 in box 1 and box 5 blank. 

$5200 tuition + $300 books, etc. = $5500 qualified expenses minus $4000 used for the AOC leaves only $1500 to be allocated to the scholarship. So the student has $600 of taxable scholarship. If he has no other income, that is not enough to pay any tax.  In fact, we should probably call the whole $2100 taxable, so we can allocate the $1500 to the 1099-Q (reducing the amount for room and board to $4000).  For simplicity, he enters the 1098-T on his return with 0 in box 1 and $2100 in box 5. If that is his only income, he is not required to file a tax return.  You may want to anyway, to document the declaring of the scholarship as taxable. 

*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. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

References:

1. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

[dlhdch]

Wow, that was a quick answer. I will need more time to fully assess it.  

A wrinkle that I had not considered was adding a reasonable amount of R&B as QEE for 529 purposes.

Prior to my post I had made trentative entries in Turbo Tax, treating the $ 2100 as a refund for 529 purposes

I assumed the plan did not by reporting the gross distribution of $5500. (There is an area available in Turbo Tax to adjust the gross distribution for refunds.)

My tentative enties resulted in the $2100 as a taxable income to the student, $4000 available to the parents for AOC purposes and only $1500 available of the net 529 distribution of $3400 ( $5500-$2100) as a qualifying distribution.  In other words, $1900 could not be used as both 529 qualified withdrawal and for AOC purposes, resulting in the income portion of the $1900 being included in the account owners taxable income.

It appears taking into account a reasonable R&B as eligible 529 QEE will allow the account owner to have no taxable income regarding the above activity.  

[dlhdch]

Hi Hal. 

I have reran the numbers in the situation above.

First of all, thanks for bringing the R&B into account for IRC 529 QEE purposes for a student living at home.  It makes sense.  An example in Pub 970 shows a student living at home applying scholarship proceeds to such expenses, supporting the concept.  In the future I will consider the deemed R&B in making withdrawals.

When considering the deemed R&B into my recalculations, the results were the same whether the 1099-Q distributions were the gross amount of $5500 as listed on the 1099-Q or a net amount of $3400, due to the inclusion of the deemed R&B.  The result were as you indicated in your reply. The parents had $4000 to use for AOC and the student had $2100 in taxable income. Which appears to be the most desirable results pending completion of the student's return. 

I have attached a copy of my calculations for your comment.  One thing I sruggle with is the proper application of the $2100 of taxable income to the student. My calculations assumed the $2100 is therefore constructively paid for outside 529 plan and applied as below:

			Student is P's Dependent.
	1098-T
		Tuition & rel exp (Tre)  paid		5200	Block 1
		Scholarships (Sch)		2100	Block  5
		Net		3100
	Other QEE- Tre not in 1098-T	Required Books	300
		Deemed R&B	5500
	1099-Q				Net				Net
		Gross Distribution-Withdrawals (Wd)-Adj	5500	Block 1	3400
		Earnings	2000	Block 2	1236
	529 QEE
								Deemed
						All Expenses	Tre	R&B
	Results: Treating all Sch as Tax Free (TF) (applied to Tre)
		529 QEE (Net Tre- Sch+QEE not in 1098-T+R&B)				8900
			5200-2100=3100+300+5500
								Deemed
						All Expenses	Tre	R&B
	Results: Treating 2100 as Taxable Sch (T) for R&B
	re 529 and AOC
				5200+300+5500		11000	5500	5500
			TF Sch	2100-2100
			Net QEE			11000	5500	5500
			Taxable Sch Applied			2100	2100
			Net- QEE available for dist			8900	3400	5500
			1099-Q Withdrawals (Adjusted)
						3400	0	3400
					OR	5500	0	5500
			Portion of Tre not in Qualifying Dist		1900
			Taxable Sch (Used for AOC)		2100
			Available for AOC			4000
			Note: 2100 taxable scholarship was taken into income and constructively
				applied to Tre- considered paid for outside of 529 plan.

I apologize for presentation above.  It was imported and I tried to clean it up the best I could.

As always any comments or suggestions would be appreciated, as I my have a similar fact situation in the future or also take an additional 1099-Q withdrawal for the deemed R&B.

[dlhdch]

Questions arise as to Room and Board (R&B) as a qualifying 529 expense for a student living at home. I understand that such expenses are allowable up to the college's R&B in its Cost of Attendance (COA).  The college's COA R&B for a student living at home with his parents $5500. 

The question arises as to actual allowable costs for such student and how to document them.  It would seem appropriate that a proportionate share of the families groceries and utilities would be allowable and the gross amount documented by an annual credit card summary.

It has been it suggested that the parents could charge the student rent to have an additional qualifying expense. It would appear this would result in taxable income to the parents.  Can this be accomplished without generating taxable income to the parents.

What other costs could be considered qualifying costs for the student? For example, proportionate maintenance on the residence?  Other costs?

Any advice wouldbe appreciated.

[Hal_Al]

As you have identified, it's not clear how the IRS looks at this and what counts. 

If you keep the "rent" below his share of the actual cost (mortgage interest , insurance, real estate tax, utilities, maintenance) then there would be no actual rental income to the parents. 

I would just use the COA, "everybody" does. 

[dlhdch]

Hi, HAL

Thanks for the response. 

I always appreciate your input.