Why is turbo tax asking for Principal and interest payments of qualified education loans in income section? How is this income? And is this for loans a parent takes out or student loans you are paying for your child?

[Hal_Al]

It shouldn't be.  Your question doesn't make sense.  Can you clarify?

[DG813]

Let me look further.  It may have something to do with using funds (shown on the 1099-Q) from our States Tuition investment plan for college expenses.  After entering, in the step by step (and entering 1098-T's from 2 colleges), you are asked various questions, including for Principal and Interest payments on Qual educ loans., but when I enter figures here, my tax liability goes up.  Seems illogical. It might have to do with not entering all my children's college expenses.  So I'm now analyzing all of there expenses to plug into the Student information worksheet to see what's going on.  None of it makes sense since we can't claim any interest (income too high), but I received a 1098-E from the lender so I assume it must be entered and not ignored.  

[medling]

DG813 - I am getting the same results, did you figure out why it increased your liability?

[AmyC]

The 1099-Q will go into your return as income IF you haven't already entered the expenses to reduce or eliminate the funds. I am going to recommend you look at another of my answers for help.  in shifting the money to make sure you are paying the least tax necessary.

@medling

@DG813

[Hal_Al]

@AmyC 

I think poster is using his 529 distribution to pay on his student loan. The TT interview asks him break the payment down into interest and principal. Then asks him if he took the student loan interest deduction.

This is new this year, under the covid rules.  I'm not sure what TT does with all that.  It might be helpful to have an explanation here. 

[medling]

I did not use my 529 to pay down the loan.  I sent it the 529 funds to the School.  I did make a substantial payment on the loan (out of pocket after tax earnings).  I did not read that these questions pertained to the 529 distribution being used to pay down the loan.  A blurb to that affect would make it more clear.  I finally assumed that was the case, since it followed the 1099-Q.

[AmyC]

Thanks @Hal_Al!  

@medling

@DG813

Yes, the 1099Q may be used for student loan interest deduction. This is almost a niche area. First, families with 529 college savings plans are limited to withdrawing up to $10,000 tax-free for use toward qualified education loans. Also note that the $10,000 limit is per lifetime, per person.

Second, the principal and interest go into the Apprenticeship and Education Loan Smart Worksheet. This uses the full amount and the principal only amounts in different calculations. See How do I preview my TurboTax Online return before filing? to view your own.

Finally, the income limitations. Which is where the deductible student loan worksheet comes into play.  The worksheet asks:

Total interest paid, limits it to $2,500 then compares your income and limits the amount of interest allowed.