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.
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:
- 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."
- 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”.
