I'm filing my daughter's tax return. She is a college student. She received a 1099-Q from the 529 plan that I had setup for her with the following information
1 Gross Distribution: $xxxx
2 Earnings: $yyyy
3 Basis: $zzzz
I noticed that Turbo Tax is calculating a tax of 10% on the Earnings of $yyyy. It is my understanding that the growth in the 529 plan is tax free, so there shouldnt be any taxes.
Thoughts on why this is occurring and how to fix?
For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return. However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well.
Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants.
For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000. Your adjusted expenses are $8,000—which means you don’t have to report any education program distributions on your tax return.
For most qualified education program beneficiaries, the amounts reported on the 1099-Q aren’t reported on a tax return. However, if annual distributions exceed your adjusted qualified education expenses, you may need to report some of the earnings reported in box 2 as income on your tax return and pay an additional 10 percent tax on it as well.
Your adjusted expenses are equal to the total of your qualified education expenses minus other tax-free assistance you receive, such as scholarships and Pell grants.
For example, suppose your qualified education expenses are $10,000, you receive a $2,000 Pell grant and boxes 1 and 2 of your 1099-Q report a gross distribution of $8,000 and earnings of $1,000. Your adjusted expenses are $8,000—which means you don’t have to report any education program distributions on your tax return.
Thank you for the clarification and explanation. Very helpful!
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 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!
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