What should my son enter for Room and Board under educational expenses if a scholarship provided the room and board and he also had a small gain on a 529 withdrawal?

[complicado502]

I'm helping my son with his taxes. He received a full scholarship from the university which covered tuition and required fees, housing, and a meal plan, and we understand the non-qualified portion is taxable. He also had a custodial 529 plan that he withdrew last year and had a small gain from the liquidation.

1. Under the "Enter Your Education Expenses" section, it is prompting for Room and Board. If we enter a value here, it seems to be taking some kind of deduction (reducing tax due). But we understand that room and board is generally not deductible. Should we enter his room and board expenses here, even though the university provided them via the scholarship? What is TurboTax doing with the amount entered?
2. Do the room and board expenses he incurred, even though provided by the scholarship, offset the small gain from the custodial 529 withdrawal? If so, where do we enter them to get this?

Thank you.

[KrisD · Accepted solution]

If the student is your dependent, you should be entering the 1098-T and 1099-Q. If there is an education credit, you get the credit. If there is taxable income, the student reports taxable scholarships and the person listed on the 1099-Q reports the taxable distribution. 

If the student is not a dependent, they enter the forms. 

Yes, enter the Room and Board expense unless it is already included in Box 1 of the 1098-T. 

If the amount paid for Room and Board is applied to the 529 distribution, the additional 10% penalty tax may be eliminated. This may be what happened to lower the tax due. 

After you enter the 1099-Q, 1098-T, and any additional expenses, click "Maximize My credit" and the program will allocate the expenses efficiently. 

[complicado502]

The student is a dependent. If the forms go on the parent's return, how do we put the taxable scholarship income on the student's return? I don't think there's any education credit to be had as I believe we make too much to qualify. For what it's worth, the student had a decent summer job and even though we are still providing the majority of the support, they have to file.

Regarding the 529, they withdrew the balance which was less than the tuition charges last year after learning they had the scholarship. So while taxable, there shouldn't be the penalty tax. Correct?

Thank you for your patience and help.

[KrisD]

Yes, the penalty is waived if the reason it was not used was because the student received a scholarship.  You can enter the 1098-T and 1099-Q and the program will give you the amount the student needs to report on his return.
From what you describe, it looks like the student can apply the distribution to the expenses and claim the excess scholarship, or claim the distribution.
If you enter the forms on your return, you will have a 1099-Q worksheet that will tell you what to report on the student's return, as well as the scholarship amount. (switch to forms mode (top right) and look at the list of forms and worksheets on the left)

To enter on the student's return:
Click on Federal,,,Wages & Income,,,,scroll down to the last section "Less Common Income"

Scroll down to the last choice "Miscellaneous Income, 1099-A 1099-C" and Start

Scroll down to the last choice "Other reportable income" and Start

For the Description enter "Scholarship" and for the distribution "1099-Q"

Enter the amount of the income that must be claimed

Click Continue repeat for the distribution and click Done

ALSO, since you can't claim the education credits, be aware that the student can claim the non-refundable part of an Education credit if he does not claim himself AND you do not claim him.
To do this, you do not claim the child. The student also does not claim himself. In the Turbotax program he selects "Yes" "Someone CAN claim me" but "NO" "Someone WILL claim me"
IN THIS CASE he enters the 1098-T and 1099-Q into his turbotax program.
You don't lose the dependent's exemption, since there aren't any this year, but you might lose credits.
He might have to report more income to get the credit, but it might be beneficial to offset his tax.
You would need to see which way gives you the best break.  It's just another option.

[complicado502]

Unfortunately, we had already filed (parent return) before working on the student's taxes. Definitely will start by inputting this in the parent return in the future.

Do we have to file an amended parent return, or is there a way to arrive at a correct outcome without doing this? You had said we could enter the 1098-T and 1099-Q and the program will give the amount the student needs to report on his return. Is this mainly informational in our situation on the parent return and just used to get the amounts for the student return?

Thank you so much for your help.

[KrisD]

The forms are entered on the parent's return so the program can do the math.


Since you are not taking an education credit, and if the forms are in his name, it would work out, in your case, to enter the forms on his return. he should not get a credit, since he is selecting that someone else can claim him and the program should tax part of the earnings on the distribution.

Sorry, that was what you were going to do in the first place, but it wouldn't have worked had you claimed a credit.




If the student is studying accounting, maybe they can figure the taxable earnings on the distribution:

Taxable earnings. Use the following steps to figure the taxable part.
1.
Multiply the total distributed earnings shown on Form 1099-Q, box 2, by a fraction. The numerator (top part) is the adjusted qualified education expenses paid during the year and the denominator (bottom part) is the total amount distributed during the year.
2.
Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include in income. Report it on Schedule 1 (Form 1040) or Form 1040NR, line 21.
Example 1. In 2010, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Over the years they contributed $18,000 to the account. The total balance in the account was $27,000 on the date the distribution was made. In the summer of 2018, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. She paid her college expenses from the following sources.

Gift from parents
$1,600
Partial tuition scholarship (tax free)
3,100
QTP distribution
5,300
Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance.
Total qualified education expenses
$8,300
Minus: Tax-free educational assistance
? 3,100
Equals: Adjusted qualified education expenses (AQEE)
$5,200 Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable.
Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Sara figures the taxable part of the distributed earnings as follows.
1.
$950 (earnings)
×
$5,200 AQEE
$5,300 distribution= $932 (tax-free earnings)
2.
$950 (earnings)?$932 (tax-free earnings)= $18 (taxable earnings)

Sara must include $18 in income (Schedule 1 (Form 1040), line 21) as distributed QTP earnings not used for adjusted qualified education expenses.
IRS PUB 970 explains it very well

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