Turbotax taxing my 529 earnings on a fully qualified distribution

[mmatrull]

I see older topics related to this but nothing this year that addresses it.  Turbotax is taxing the earnings on my 529 distribution even though I have more than enough Qualified expenses between the 1098-T and other qualified expenses.  It appears that it simply does the calculations incorrectly.  The Qualified expenses in the forms view simply doesn't match what I have entered in Turbotax.  And I do not qualify for any Credits so there's no way they should be adjusted due to double dipping.  Can someone help explain the issue?  I'm tempted to just not enter the 1099-Q but that seems like a poor work-around.

[Hal_Al]

.Q.  I'm tempted to just not enter the 1099-Q but that seems like a poor work-around?

A. That's the way to do it. The IRS says so.

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.  

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”.

Q.  It appears that it simply does the calculations incorrectly.    Can someone help explain the issue?  

A. There are too many ways to make a mistake. Here's just one (that user pointed out just recently). 

In "Education information" there are several questions that need to be answered to verify the student is meeting all of the requirements for using the 529 distribution.  After answering those questions, my tax calculation finished correctly without needing the override value. https://ttlc.intuit.com/community/college-education/discussion/re-529-earnings-taxable/01/3279005#M5...

One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. That reduces the amount that can be used to claim the  529 earnings, shown on the 1099-Q, as being totally tax free. 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

[mmatrull]

Thanks for your response Hal_AI.  Unfortunately that other post did not help me.  I had answered all those questions and re-entered multiple times and it makes no difference to how TT is adjusting my qualified expenses.  They were all straightforward too.  No other credits...no convictions etc.

I guess I will just delete the 1099-Q and 1098-T and all  the other expenses and just keep for my records.

Unfortunately I'm thinking I lost out on thousands of dollars of excessive taxes over the past few years assuming TT was performing the same incorrect calculation.  So after I submit 2023 I need to go back and re-assess how much $$ I overpaid.

Thanks for your help!

[mmatrull]

One other item I forgot to mention.  I went through the Education Summary probably 30+ times and never once received the  “Amount Used to Calculate Education Deduction or Credit” screen.  It just doesn't show up in my flow.

[AmyC]

You can still amend 2020 until April 15 for a refund then work on 2021 and 2022.  You should have a summary screen showing. The education expenses screen is the starting place to reach all things. If you are online, you may want to  clear cache and cookies,

See  How do I amend my federal tax return for a prior year?

@mmatrull 

[sgruby]

The bug is still present in TT 2024 (for Mac).

In the education expenses section, if I enter the qualified expense, tax goes up, set it to zero, goes down, set it back to the original value, it goes up. Delete the value it goes away, tax goes down. The original value comes back, but the tax does not go up.

I'm going to have to carefully check my taxes when I'm done to see what other mistakes TT has made.

(I do have a video demonstrating the issues; there is clearly something wrong and almost cost me some money.)

[Hal_Al]

As previously stated, 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. That's encouraged by the IRS.

There's also a workaround. 

Instead of entering the educational expenses in the education expenses section, enter it in the 1099-Q section of TT. 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. Press Done at the 1099-Q summary screen, to get there. 

[randsom]

So stupid that TT can't figure out that 529 distributions are tax free.  This is basic accounting.  I answered all the education questions, entered my 1099-Q info and tax owed shot up! 

[Hal_Al]

There are three things you can do with your Qualified educational expenses (QEE):

1. Allocate then to scholarships (so that the scholarship remains tax free)
2. Use them to claim an education credit
3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, but it doesn't do a very good job if you want something different. TurboTax allocates QEE, in that order, until you tell it otherwise.  It's best if you have some idea of the outcome expected, when you make your entries. In addition to entering numbers, you must complete the “Education Information” sub-section. In particular, be on the lookout for a screen “education expenses used for a tax credit”. It will usually be prepopulated (sometimes with $10K instead of the more appropriate $4K). You . You can change it for the amount you want to allocate to the ed credit, including changing it to 0. 

If you don't get that screen, check the student information worksheet. You can change it there (line 17). Make the change in the first column.  

[randsom]

I have gone through all the education questions, but still no “education expenses used for a tax credit” prompt.

[AmyC]

The Education Summary screen allows you to edit your numbers. Once you have taxable income as tuition, you will see the screen allowing you to select the education credit.

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 you remove the 1099-Q, the program won't be trying to use money in the order it prefers. Tuck the Q into your tax folder along with proof of the expenses.

@randsom