TurboTax 2023 Incorrectly Calculating Adjusted Qualified Education Expenses

[robca2010]

TurboTax 2023 appears to be incorrectly calculating Adjusted Qualified Expenses on this year's tax return.

I entered the following example below in TurboTax that is similar to my tax situation.

I entered $9000 in tuition payments from the 1099-Q. There were no scholarships, loans, or other situations. I then entered $1000 in books & other materials. We qualified for the America Opportunity Credit of $4000.

I took a 529 distribution of $1000 where $600 is basis and $400 is gain.

Turbo tax is saying that we owe taxes on the $400 gain.

The Student Information Worksheet - Part VI Education Expenses, shows the summary with the incorrect calculation.

It shows

Line 1 - Tuition Paid $9000 - {which is correct}

Line 3 - Books $1000 - {which is correct}

Line 13 - Total Qualified Expenses $10,000 - {which is correct}

Line 17 - Used for Credit $10,000 - {which is NOT correct. Should be $4000}

Line 19 - Total Adjustments $10,000 - {Not correct due to line 17. Should be $4000}

Line 20 - Adjusted Qualified Expenses (529 plan column) $0 - {Not correct due to line 17. Should be $6000}

I should be allowed to take up to a $6000 529 distribution without any of the gain being taxed.

Even though I took a $1000 529 distribution with $600 basis and $400 gain, Turbo Tax is saying that all of the $400 gain is taxable.

I have had the same situation in previous tax years, where I have taken the $4000 American Opportunity deduction. The $4000 AOC deduction was deducted from my total qualifying expenses. The resulting adjusted qualifying expenses were always higher than what I took for the 529 distribution, so I never had to pay any taxes on the distribution. This appears to be a bug.

I tried this with a competitor's tax program and it performed all the calculations correctly. It properly used $4000 for the AOC credit in line 17 and it properly calculated line 20 to be $6000 for the allowed 529 distribution with no additional tax.

I looked at the answer given in article taxing-a-529-distribution

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)

In my example there was no scholarship, so this value was zero, which is what results in $6000 can be used against the 1099-Q. In this case, I see TurboTax is taking all that was paid in tuition and books ($9000 + $1000 => $10,000) and using the entire amount as the credit, instead of using $4000 credit which is the correct amount used for the AOC credit.

I called TurboTax customer service. One of the service agents entered the same values in their customer support version of TurboTax as me and got the same exact results. They entered the same tuition amount from the 1098T, the books, and the 529 distribution amount from the 1099-Q. They ended up with the same exact incorrect calculations on the Student Information Worksheet, Part VI, education expenses, and resulting message that taxes were owed on the 529 distribution gain as I did.

I am still waiting to hear back from TurboTax on my issue.

[Hal_Al]

Yes, the TurboTax program doesn't do a good job.  Just delete the 1099-Q, since you know none of it is taxable. 

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! 

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”.

If it's important to you to get that worksheet, the key is usually the screen where you enter the amount used to claim the credit. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education  Credit”, verify the amount you want to use or change it.  

If that doesn't work, the workaround is: when asked who is the student, check "someone else not listed here" (Lying to TurboTax to get it to do what you want does not constitute lying to the IRS). On the next screen, enter the real student's name.  This will eventually give you one simple screen to enter all expenses (reduce the tuition amount, by $4000 for the AOTC). Press Done at the 1099-Q summary screen, to get there. 

To claim the AOTC, enter the 1098-T, as usual in the education expenses section.

[robca2010]

Thanks for your reply.  Your suggestions are very helpful.  

I found your suggestion on the post - (see link) and below resolved my issue.  I found some other interesting things about getting to that menu, which are mentioned in the other post as well.

Yes, that's the usual error, TT incorrectly uses $10,000 for the tuition credit, instead of $4000.

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.  You may reach that screen sooner.