What to populate in the "Amount Used to Calculate Education Credit" field which defaults to $10k

[jkreit70]

I am unsure what amount to enter for "Amount Used to Calculate Education Credit" on my son's tax return. He has an Educational Savings Account (ESA) from his grandparents and a 529 plan from us, his parents. The ESA funds were in his name and used to pay for education expenses, while the 529 plan funds were received by us and used to pay for part of his education expenses. We, the parents, did not qualify for or take any education tax credits.

Regarding the ESA and Qualified Tuition Programs section, we received two 1099-Q statements: one where my son is the recipient/student (ESA) and one where he is not the recipient (529), but still the student. I reported the 529 plan on my tax return (parent's return) with all qualified education expenses. Additionally, we reported both the ESA and the 529 plan on my son's tax return along with all qualified education expenses. I did indicate on my son's tax return that the distribution recipient for the 529 plan was "Someone else not listed here."

When I worked on the Expenses and Scholarships (Form 1098-T) section, it prompted a message stating that I was trying to enter education credits for myself, but I had earlier indicated that my son was claimed as a dependent on someone else's return. Finally, under Education Information, the program noted that if the person claiming my son as a dependent also used some or all of the education expenses for a tax credit, I would need to indicate the amount used for the credit because it might make part of the distribution taxable.

The "Amount Used to Calculate Education Credit" field is defaulting to 10k, which results in my son owing additional taxes even though the 529/ESA was less than what we spent on qualified education expenses. Should I enter 0 in the field or leave it at 10k?

Please note that this was submitted and if I change it -- I will have to send in an amended return and will need short wording as to the issue.

[TeresaM]

It is important to enter all the income, then the Form 1099-Q, and then the Expenses and Scholarships ( Form 1099-T section. 

If it is entered out of order, the system may be reserving $10,000 of educational expenses toward an education credit, either American Opportunity Credit or Lifetime Learning Credit.  You may want to see if that leads to qualify for a credit, but if it does not, or if it will cause part of your 529 distribution to become taxable, then yes, it is fine to change that field to zero or the amount of qualified expenses that were more than the 529 distribution.

Also, if room and board were paid from the 529 distribution, please go back through the Education Credit section and be sure those were entered.  That is not a qualifying expense for the Education credits but can be used with 529 funds. 

This information cannot be changed in the original return after you file and you should wait until the return is either accepted or rejected.  If your return is rejected, you will be able to modify before you resubmit.   

If your return is accepted, you can amend, or correct, your return if the original entries need correction. There is no additional charge to use Turbo Tax to amend your federal or state return but you will need to wait until the IRS and your state have finished processing the original return. You do not want two copies of your return there at the same time and sometimes they make adjustments.  

This is a TurboTax Help article with some Do's and Do nots of amending.

[jkreit70 · Accepted solution]

Thanks -- the return's were accepted by both State/Fed.  However, the amount of taxes due for Fed is not due to be paid until April 15.  Should I wait until then or submit now?  

Also, being prompted by TurboTax as to why I need to amend the return assuming this covers it:

1. Amending 2022 tax return due to TurboTax error.
2. Incorrectly left 'Amount Used to Calculate Education Credit' at 10k on son's return instead of 0.
3. This caused an incorrect calculation of taxes owed.
4. Amended return being submitted with corrected information; no education tax credits were taken on parent's return.

[TeresaM · Accepted solution]

I would not submit an amendment until the original return has processed. 

• If the amendment results in a refund, (as is most likely) it will not matter if it comes in past April 18th. 
• If the amendment results in additional taxes owed, you can make a direct payment on the IRS website in advance of the amendment, so the payment will be on time and there will be no penalty or interest. 

This is the IRS page where they can take payments for amounts due on returns or for estimated payment. Please be sure to select what type of payment.

For the short description in the amendment, you may simply say correcting qualified education expenses applied to 529 distribution

[Hal_Al]

Is your son an undergrad or grad student?

Are you eligible for the education credit (is your income under $90K, $180K married filing jointly)?

If you're eligible and your student is an undergrad, the amount used for the education should have been changed to $4000 (American Opportunity Credit). $10,000 is for grad students (Lifetime Learning Credit).

If eligible, you want to claim the generous AOC and maybe even the LLC; even if it means paying a little tax on the ESA distribution (or some of his scholarship).  The AOC is $2500 Max (based on $4000 of expenses). While the LLC is $2000 (on $10K of expenses). 

_______________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
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 (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**Alternatively; 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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, in case of an IRS inquiry.

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." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings.