Reporting Non Qualified and Qualified 529 Distribu...
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mom2boys
Returning Member

Reporting Non Qualified and Qualified 529 Distribution

I took two distributions from my 529- one was a nonqualified and one was qualified distribution. My 1099Q shows the total distribution for the year. How do I break out the two and determine earnings and the basis? How do I report these on my tax forms?

2 Replies
npierson7
Level 1

Reporting Non Qualified and Qualified 529 Distribution

Form 1099-Q typically lists the total distributions from a 529 plan during a given tax year, regardless of how the funds were spent.

The earnings portion of a taxable 529 plan distribution must be reported on the beneficiary’s or the 529 plan account owner’s tax returns. To calculate the taxable portion of the 529 plan distribution:

  • Divide the qualified distribution amount by the total 529 plan distribution (Form 1099-Q, Box 1)
  • Multiply the answer by the earnings portion of the total distribution (Form 1099-Q, Box 2).
  • Subtract this amount from the total distributed earnings                                                                                                   If you are qualified for the AOTC or LLTC, you must adjust your total qualified higher education expenses to avoid double-dipping. To determine the amount of a qualified 529 plan distribution, any amount used to generate the federal education tax credit must be subtracted from the total qualified expenses.

You can learn more about the topic here:

Guide to IRS Form 1099-Q: Payments from Qualified Education Programs

 

Hal_Al
Level 15

Reporting Non Qualified and Qualified 529 Distribution

You don't want to split them apart.  TurboTax (TT)  can't handle that.   The IRS will consider it one distribution too.

First, enter the 1099-Q at:

Federal Taxes Tab (Personal for H&B version)

Deductions & Credits

-Scroll down to:

--Educations

  --ESA and 529 Qualified Tuition Programs (1099-Q)

 

Then enter your educational expenses, including the 1098-T, at:

Federal Taxes Tab (Personal for H&B version)

Deductions & Credits

-Scroll down to:

--Education

  --Education Expenses

Include books and room and board (be sure to say you had book expenses even if your didn't, to get to the room & board entry place).

 

TurboTax will calculate the taxable portion, including the 10% non qualified distribution penalty.  If you had any penalty exceptions, TT will handle those too. Follow the interview carefully.  See sample taxable calculation below.

____________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans)

 

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 529 plan. 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.

 

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 (usually on the student’s return)

 

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)

 

**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. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

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." 

 

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