Two 1099-Q (in parents and student name) and 1098-T (student name)

[JayKP]

Hello,

This is with reference to last year's message chain https://ttlc.intuit.com/community/college-education/discussion/1099-q-and-1098-t/00/2864188, I have something similar situation. Instead of 2 kids, I have one kid but we both got 1099-Q. He got a 1099-Q for a prepaid tuition plan from IL which was sent directly to college. I received a 1099-Q for a 529 plan withdrawal. 

I am not sure if I will claim him as dependent or not

I was on track for 529 withdrawal until the college issued him a scholarship for spring 2024 for the amount of $7500 in the last week of 2023, and because of that, now 1098-T has $15000 (instead of $7500 which he got for Fall 2023)

here is my situation: so what is your suggestion?

Is the student the parent's dependent?	yes / not sure
Box 1 of the 1098-T	$24,175.00
box 5 of the 1098-T	$15,000.00
Any other scholarships not shown in box 5	no
Does box 5 include any of the 529/ESA plan payments (it should not)	no
Is any of the Scholarship restricted; i.e. it must be used for tuition	for tuition only
Box 1 of parent's  1099-Q	$14,500.00
Box 2 of parent's  1099-Q	$2,514.00
Box 1 of students' 1099-Q #1	$6,678.00
Box 2 of student's  1099-Q #1	-$220.00
Box 1 of students' 1099-Q #2	$0.00
Box 2 of student's  1099-Q #2	$0.00
Amount of High School tuition	$0.00
Room & board paid during college. If student lives off campus, what is school's R&B charge.	$5,902.00
Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers	$1,289.00
How much taxable income does the student have, from what sources	$0.00
Are you trying to claim the tuition credit (are you eligible)?	No, as AGI is little more than $180K

[Hal_Al · Accepted solution]

Q. What is your suggestion?

A. Fuhgettaboutit

The 1099-Q and the  1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.

Ignore the Student's 1099-Qs, there's no earnings to tax.  For your 1099-Q, there are sufficient expenses to cover the whole distribution. 

Tuition after Scholarship  $9175

Room & Board                      5902

Books etc                              1289

Total QEE                            16,366 > $14,500 on the 1099-Q

You allocate all expenses to the parent's 1099-Q.

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”.

[JayKP]

Thanks @Hal_Al for the detail explanation.

quick question, if I file tax return for my son even, he does not have earned income, will he get AOTC? in other words, without any income, can someone get "refund" under American opportunity tax credit?

[JayKP]

and one more thing, that direct payment of $6678 from IL prepaid program to college is not count under $15000 scholarship which is given by university.

[Hal_Al]

 Q. If I file tax return for my son even if he does not have earned income, will he get AOTC? in other words, without any income, can someone get "refund" under American opportunity tax credit?

A. No. Congress wrote the law specifically to prevent that. Even if he had some earned income, he could not get the refundable portion of the AOTC.

A full time unmarried student, under age 24, even if he doesn't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit. 

.Reference: Line 7 instructions for form 8863. https://www.irs.gov/instructions/i8863

[JayKP]

@Hal_Al 

As our AGI is more then 180k, we are definitely not eligible for AOTC this year.

So, one hypothetical question... if our son was working and had earned income, say $15000 in 2023, was the above situation changed? was he eligible to get AOTC benefit?

I am asking this for future planning. He may get some paid internship this year and following years. So, if that the case, he will have earned income in 2024. So, is it benefit for us to withdraw 529 payments on his name instead of my name as our AGI will not make us qualify for any education credits?

[Hal_Al]

Q. So, one hypothetical question... if our son was working and had earned income, say $15000 in 2023, was the above situation changed? was he eligible to get AOTC benefit?

A. No. The $15,000 would have to be more than half his total support for the year, in order to qualify for the refundable AOTC.

Q. Is it benefit for us to withdraw 529 payments on his name instead of my name, as our AGI will not make us qualify for any education credits. 

A. No. The fact that you don't qualify for a tuition credit is not relevant to the separate issue of who should be the recipient of the 529 distribution. 

Q. Is it benefit for us to withdraw 529 payments on his name instead of my name.

A. Simple answer: No.  The kiddie tax will apply, so any taxable portion of the 529 distribution will mostly be taxed at the parent's tax rate. Depending on the numbers, the first $1250 may be taxed at the student's rate. 

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable).

[Vanessa A]

No.  As long as your son qualifies as a dependent, he is not eligible to get the AOTC.  If he would then fully support himself (or pay over half of his own living expenses when earning $15,000) he would only qualify for the non-refundable portion, not the full credit.  

"If you were under age 24 at the end of 2023 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, you can claim your allowed credit, figured in Part II, only as a nonrefundable credit to reduce your tax.

You don't qualify for a refundable American opportunity credit if 1 (a, b, or c), 2, and 3 below apply to you.

1. You were:

a. Under age 18 at the end of 2023, or

b. Age 18 at the end of 2023 and your earned income (defined later) was less than one-half of your support (defined later), or

c. Over age 18 and under age 24 at the end of 2023 and a full-time student (defined later) and your earned income (defined later) was less than one-half of your support (defined later).

2.At least one of your parents was alive at the end of 2023.

3.You're not filing a joint return for 2023."  Instructions for form 8863

Note, you cannot just say he is paying over half of his own support based on the amount he earns. 

Click on the link above for the instructions to determine what would need to happen in order for him to qualify for the refundable portion of the credit. 

[JayKP]

Thanks, @Hal_Al and  @Vanessa A for the information.