Room and Board Expenses Not Able to be Applied Against 529 Disbursements Reported on 1099Qs

[cdean2]

After being a long-time patron, here's why I will no longer be using TurboTax software:

1.  the 2025 tax software does not have any place where one can put expenses for room and board to offset  529 distributions (as reported on the 1099Q form).

2.  I contacted TurboTax multiple times and was put on hold (with anticipated time of response being 20-25 minutes), but a live person never responded within that time.

3.  After multiple calls, I did finally reach a live person (who was quite gracious and accommodating); however, after her investigation concerning the issue, she sent me an email notice stating that I could simply not put my 1099Qs on my tax return (which sounds like an audit waiting to happen). 

4.  She then sent me a follow up email notice advising that "TurboTax currently does not have a specific section to enter room and board or computer expenses related to education . . . . there is no announced update specifically adding these inputs to TurboTax at this time."   

Interestingly, when one does a search in TurboTax about room and board expenses, their response includes the following:  "Room and board expenses can be used for tax-free distributions from a Coverdell ESA or 529 plan.  To quality, the student must be enrolled at least half-time in a degree or certificate program.  Room and board expenses can be included in the qualified education expenses for the nontaxable portion of the plan's distribution." 

SO . . . TurboTax tells you that you can include room and board expenses against the 529 distributions, but they do not provide a way to put these into their tax software.  All this does is treat any reported 1099Q distributions as income (subject to tax and 10% penalties). 

After years of patronage to TT, looks like H&R Block will be the way to go.

[PhxSand]

i have the exact same issue. and haven't had this problem with TT in prior years. wonder what changed this year? anyway, thanks for confirming and now I will have to switch to another provider after 20+ years with TT.

[Hal_Al]

You can't enter those room & board expenses yet. This is a known glitch in TurboTax (TT). They are working on it (no announced fix date).   The 2025 education and 529 sections appear totally redesigned, from last year. 

[cdean2]

Wouldn’t it be nice for them to let us know that (i.e., that there is a “glitch”)?  Notice in the email I received yesterday, there is no mention of a “glitch.”  What if I went ahead and filed my taxes based upon this reply from yesterday?  Seems that I would have not gotten the education expense benefits due to their “glitch” . . . and would never known it.

And in re-reviewing 2024 taxes, this may have existed then as well.  Looks like some deeper probes are warranted.

[Bugswell]

I just came across this same issue of not being able to enter room and board/food/computer expenses to offset 529 withdrawal.  My frustration level with Turbotax is reaching a high point as this is the third issue I came across today. The others are 529 to Roth 401K  conversions showing as a taxable event and Turbotax still not having rental property depreciation available even though the message shows it should be available by February if not sooner.  This does not give me confidence with the accuracy of this program.

[anonymouse1]

Enter your 1098-T and your 1099-Q, then go to Forms.  Look for the Student Info Wks right under the Dependent Wks.  Scroll down to Room and Board and enter the amount there.  If you are claiming the AOTC or Hope credit, look at line 19 and put in the amount of the tuition you want to apply to the credit (maximum of $4000 - you can enter more, but it won't get you a larger credit and will make your 529 withdrawals taxable - for some reason mine was set to $10,000!).  The tuition, scholarships and the 529 distributions should already be in there from the interview process but check that the numbers are correct.  Save the file while still in Forms, then switch back to Step by Step and make sure that nothing has changed.  I did find that when I opened the file again that Room and Board *or* the amount applied to credit had been changed from when I saved them, so I'm not confident yet that they would be e-filed correctly.  I hope they fix this soon since it's the last part I'm waiting on to file.

[PhxSand]

thanks for the tip. unfortunately i am using TT's online version since it was free through my employer, and it appears i might need to pony up for the desktop version to do what you are suggesting (which makes sense to me). it is very frustrating that TT left such a gap in the 1099Q and 1098T sections, and from all of the responses it appears that a lot of us are struggling with this issue.

[PhxSand]

anyway, meant to mention that the online version doesn't allow you to go to Forms, that's only with the desktop version. fun times for sure...

[WanderingEarthMagnet]

This is a glitch, it isn't new, and there is no announced resolution or date.  Lots of people are here advising that you should just not enter the 1099-Q, but I think that is risky.  The IRS has a copy of the 1099-Q, and they have algorithms that could (probably would) detect when you don't include it.  

Scenarios vary for how big of an issue this is, depending on whether the beneficiary is a dependent or not.  If a 1099-Q is issued with you as the recipient, and the beneficiary is not your dependent, TurboTax (and virtually all tax software) will err on the side of caution, and charge full tax, even if all of the money was spent on qualified educational expenses.  And with the current glitch in TurboTax, you may also be assessed a 10% penalty if it thinks the money wasn't spent on qualified expenses, like room and board.

The simple workaround that I use for all these issues, which, unfortunately, only works in Desktop:

1. I enter the 1099-Q.  TT doesn't let me enter necessary details and costs for educational expenses, so I am stuck with tax and penalty. 
2. Then I go to FORMS mode (button on top-right of TT screen). 
3. I then navigate to the 1099-Q form.
4.  On the top menu bar, I click edit and select "override."
5. I go to line 2d on the 1099-Q form and enter the entire amount spent on qualified costs.  It will be red because of the override, but it will stop reflecting tax and penalties.
6. The refund amount on the top of the screen updates to reflect that I no longer am charged the tax and penalty.

Now everything balances.  The 1099-Q has been entered, and I don't have to pay unnecessary taxes and penalties.  This solution comes with the disclaimer that once you do an override on a form, TurboTax is no longer responsible for what was reported on the form - you are.  In my case, I think that carries less risk than omitting the form and inviting the IRS into my life.

[Hal_Al]

@WanderingEarthMagnet  What you describe overriding is not form 1099-Q.  It's the 1099-Q worksheet.  That is not sent to the IRS.  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on any actual tax forms (TT does not inform the IRS that your distribution was fully covered by expenses).  It just doesn't report anything. There is no more risk doing nothing than going thru the effort to get TT to tell you what you already know. 

  The 1099-Q is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you probably can. 

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. 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 don’t need it). 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.

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”.
3. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 

[WanderingEarthMagnet]

Thanks for checking me on that.  I was wondering whether that worksheet actually gets submitted along with the return.  Based on your input, I did a deep-dive, and it appears that you are correct - the IRS doesn't see anything different between the override method vs. the omission method.  At least now it will be in my documents as a record.  Your way is a lot simpler and more direct.

That leaves me to wonder by TurboTax doesn't handle this more gracefully.  By default it wants to charge tax and penalties after the user enters the info that it asks for, even when the expenses are fully qualified.  I hate to think how many people pay extra tax each year because they don't know better.

[rlculbert]

Appreciate this.  Unfortunately, by doing the override in the form, TT will not allow it to be filed electronically, so would have to do a paper/mail filing.  Any thoughts on if/when TT may correct the error, or is the paper/mail thing our only option?

[anonymouse1]

Since I have no confidence that the numbers I saved would be the ones transmitted to the IRS when e-filing, I'm considering printing the forms out and mailing them if TT doesn't get this fixed in the next couple of weeks.

[cdean2]

It is interesting that today I received an email from TT asking if my question had been answered and if so to mark one of the comments as an "accepted solution."  I appreciate all the input to my question; however, it seems that the comments suggest that there is more broad scale uncertainty and frustration about the situation than ever before.  After watching the Superbowl commercial that highlighted TT, I was wondering if some of the $$ paid for advertising during the SB might have been used to remedy this problem for their paying patrons who would like to have a credible tax software to use in filing their taxes.  Just a thought . . . Still no resolution.

[PhxSand]

FYI - I sent some comments on TT's FB account, and figured that might get some traction. they have responded multiple times now and keep suggesting the same stuff that doesn't work because it doesn't address the underlying flaw in their system. i will continue to push that avenue and at least they respond quickly (guessing it's just AI which is a bit frustrating).