Splitting non-deductible 529 withdrawal between parents and student.

[Arches National Park]

In 2019, we took out more than actual college costs bc only 1 of the kids my now deceased father created 529s for are going to college so there will be left over money. We did this in 2019 because even though taxes have to be paid on the non-qualified withdrawal, our student’s scholarships remove the 10% penalty. 

• Total eligible ed costs paid in 2019=$46047. 
• College costs per T1098=$36,694; $9353 for dorm/board/computer/books
• Scholarships and grants for tuition: $23186
• Final amount we paid = $22861

• Withdrew from 529 plan: $35011 (earnings of $22968) as $27011 (earnings $17560) to student and $8000 (earnings of $5408) to parents.
• $4000 of expenses to AOTC.
• Do we owe taxes on $4117,  $12150, or some other amt?

Entered 1099Qs on our respective taxes tax forms as well as all expenses on both forms. (For student’s return, TT said expenses should to be entered to get the deduction of expenses not used on parents form.)  Beyond $4000 of expense to parent form for AOTC, how do we allocate the remaining expenses between parents and student? Should we allocate enough to cancel the 1099 income to parent ($8k with earnings of $5408) and the rest to student?  Or some other way?  Does the basis money withdrawn figure into anything regarding taxes  besides subtracting it out of the amount received?  Thanks for any help.

[Carl]

The 1099-Q gets reported on the tax return of the named beneficiary whose SSN is on the 1099-Q. Period.

In a case where the parent is the named beneficiary and that parent has two kids in college, the parent can claim the funds between all eligible students as desired.

Any left over 1099-Q funds not used for qualified expenses (which includes room and board for a student) is taxable income to the named beneficiary on the 1099-Q. Excess withdrawal penalties may or may not apply also.

[Hal_Al]

Q. Do we owe taxes on $4117,  $12150, or some other amt?

A.  Simple answer: Some other amount. You owe tax on  $10,595. You paid $22,861 in expenses. Less the $4000 used for the AOTC = $18,861 can be used against the 1099-Q(s). 18,861 / 35,011 = 53.87%  of the earnings are tax free  or 46.13% is taxable. 0.4613 x 22,968 = $10,595.

As others have said, you cannot allocate between parents and the student-dependent unless each is a recipient of a  1099-Q*.  But, if so, you are free to allocate the expenses as you see fit.

Q. Should we allocate enough to cancel the 1099 income to parent ($8k with earnings of $5408) and the rest to student?  Or some other way?

A. Some other way.  But first to address cancelling the parent income.  That usually is slightly better. But, the income is unearned income and is subject to the "kiddie tax" on the student's return. You may have to do trial returns to see which way is best.  But, the better way, is to have the student report some of his scholarship as taxable income**, to free up  expenses for the 1099-Q.  Taxable scholarship is treated as earned income, for purposes of calculating a dependent's standard deduction.  Here's a long thread, with  detailed explanations and some examples.  If your student has no other earned income, he wants to declare $11,850 of his scholarship as taxable. This would lower the taxable amount of the 529 plan earnings distribution to about $2800.

 https://ttlc.intuit.com/community/college-education/discussion/is-any-of-my-son-s-college-scholarshi...

*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.

** You cannot do this  if the conditions of the grant are that it be used to pay for qualified expenses (tuition and fees).

[Arches National Park]

Thanks Carl and Hal_Al. 

In answer to your questions-

• student had earned income of $3858 
• we have two 1099-Q's:  one to parent ($8000; $5408 is earnings) and one to student ($27011; $17560 is earnings).    
• Will check but I think the scholarship & grant were for tuition & fees only. 

We put student 1099-Q on his 1040 & marked $4000 allocated to AOTC on parent 1040. It shows he owes taxes on $5298. For the parent 1040, we entered the 1098-T, but do we enter only the parent 1099-Q, or also enter the student 1099-Q? One way shows we owe taxes on the entire 10595 you said is taxable. The other way shows no educational deductions or AOTC credits at all. What am I doing wrong and how to I get it to allocate the expenses between the two forms? Thank you for any help! 

[Hal_Al]

$5298 is the correct amount for him to pay tax on, if you allocate all the expenses to his 1099-Q. That would leave no expenses for the 1099-Q in your name (that goes on your 1040). So, your taxable amount will be $5408.

You do not enter the student's 1099-Q on the parent return. It goes only on the student's return.  Your 1099-Q goes only on your return. 

Q. What am I doing wrong and how to I get it to allocate the expenses between the two forms?

A. You have to allocate the expenses manually.  TurboTax (TT) cannot do that for you (your situation is too unique and complicated).  On each return, enter only the expenses you want to use.  Be sure you don't duplicate the $4000 AOTC offset

First you need to definitively answer  the question about the conditions of the scholarship. With $3858 of other earned income, $7992 (11850-3858) is the amount of scholarship you want him to pay tax on.  After you made that determination, reply back and I'll try to give you detailed instructions.  

[Arches National Park]

Thank you again Hal_Al. 

The college is closed today so I can't get the info on the $18200 of scholarships til Monday. $4986 of the financial assistance was from the State office of Voc Rehab. In response to my inquiry, they only replied "Our Authorizations are tax exempt". However, the $ can only be used for tuition and fees. VocRehab notified the college to bill them for that amt; when they were billed, they sent the $ directly to the college. We never rec'd any statement or tax form , but I assume we still needed to include it in the calculations, If that is incorrect, lmk and I'll remove it. 

You said "On each return, enter only the expenses you want to use." Does that include just the Other Expenses or also tuition because I though the 1098 T had to go on the parents form? 

Looks like the Kiddy tax is triggered on student form. However, would it better to have us use enough expenses for the AOTC and to cancel out our taxable distribution, thus pushing all taxable income to student's form? We had lg med expenses in 2019 and any increase in our AGI will reduce our med deduction from Schedule A. Or is that a factor? 

Thank you for your invaluable help and patience with this complex situation. 

[Hal_Al]

Q. On each return, enter only the expenses you want to use. Does that include just the Other Expenses or also tuition because I though the 1098 T had to go on the parents form? 

A. That includes tuition and all expenses. "The 1098 T has to go on the parent's form"  is not technically correct.  All that statement means is that only the parent can claim an education credit (because the student is his dependent)*. So, $4000 of the tuition must go on your return, to claim the AOTC. The rest can be allocated as needed.

Q. Would it better to have us use enough expenses for the AOTC and to cancel out our taxable distribution, thus pushing all taxable income to student's form?

A. Yes, almost certainly, since  you have  the additional factor (lg med expenses in 2019 and any increase in our AGI will reduce our med deduction from Schedule A). But, the only way to be sure is run the numbers both ways.  That's more easily done with the download software that TT online.  

I agree, it sounds like the $4986 of the financial assistance  from the State office of Voc Rehab was earmarked for tuition and fees and cannot be diverted to taxable income. 

*The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or deduction and/or your student has taxable scholarship income. If you claim the tuition credit, you do need to report that you got one (or that you qualify for an exception}. So, that's why "the 1098-T goes on your return". 

[Arches National Park]

The $18200 from the college is tuition and fees only. Thus, all financial assistance was tuition and fees.  

Student Info Worksheet Line 17A-do we need to manually enter something in this box on student and parents forms? If so, what amounts?

We are going to take additional non-qualified deductions in 2020. Is there any advantage to take them under student's versus parents tax ID, or split them as we did in 2019? 

Thanks so much! 

[Hal_Al · Accepted solution]

There is no line 17A on the Student Info Worksheet. There is a line 17 with several un-numbered (and un-lettered) columns.  TurboTax (TT) should fill in the boxes on line 17.  If it fails to do so, you can manually enter them (with TT desktop, not online).  You enter $4000 for the AOTC.

On your return, the simple thing to do is enter only the 1098-T. Do not enter the 1099-Q*.  You will use $8000 of expenses to offset the 1099-Q, so that none, of the box 2 amount is taxable. 

On your student's return, you reduce the expenses he enters by $8000 (don't reduce  by an additional $4000, the program accounts for the $4000 used for the  AOTC claimed by the parents**.

Q.  Is there any advantage to take them under student's versus parents tax ID? 

A.  Yes. That puts the taxable portion on the student's return, rather that the parents. That USUALLY results in lower tax for the family, because, even with the kiddie tax,  some  of the income is taxed at  the child's tax rate

*You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board, 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.

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." 

** In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000.  Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is  to enter $4000 less ($12,000 less total in your case) expenses.

[Arches National Park]

The A after Line 17 was an error. Sorry for that. 

With your expert guidance, it looks like everything came out great. The screen on student's form came up to enter the $4000 like it should. No 1099Q on ours. $8000 of expenses not entered on his, and $4k in AOTC expenses removed from his via TT. He owes  tax on $10499. That's slightly different than your original forecast, but the difference is due to the earnings on the two 1099Q's being different percents. Originally, they were combined, but with parent's no longer reported, it reverts to earnings % for student only. 

What seemed next to impossible to figure out, you made it so easy. THANK YOU, THANK YOU. Hopefully it will be a breeze next year.