Where in TurboTax do I enter the college tuition refund amount received - related to qualified education expenses?

[BK2000]

Using desktop installed TT Deluxe on Win11.

I am the parent of a dependent full-time college student, the student is the beneficiary of a 529, and scholarships.

Received a college tuition refund once the scholarship was applied.  Therefore when entering the 529's 1099-Q data in TT, I should also enter the amount that was refunded by the school, right?  But where?

Steps used on the student's return:

• In Federal Taxes > Deductions & Credits > Education > ESA and 529 qualified tuition programs (Form 1099-Q) > Selected No on ESA beneficiary, but Yes that I “received Form 1099-Q …QTP”.
• Entered the 1099-Q Information until I got to the “Refund of Education Expenses” screen.
• Selected “Yes, I received a refund of qualified education expenses”.
• Then selected “No, I did not re-contribute the refund”.   (BTW, I don't see the impact of these last two bullets on any form!  Is there?)

I was expecting some new field to appear during these steps in order to enter the $ amount of refund received.  But no new field appears.  So the question is: where in TT do I enter the refund amount, or how do I handle this refund in preparing the dependent student's tax return?  or parent's tax return??

(FYI the 529 distribution is slightly over the QEE, tho not subject to the 10% penalty, the excess needs to be reported as income on the beneficiary student's tax return)

TIA

[AmyC]

Let's start fresh and begin with the 1099-Q. Is there a way to manipulate room and board and maybe some tuition to use up the whole thing? If so, delete your entry and tuck it into your tax folder. IRS Publication 970, Tax Benefits for Education states:

If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions.

You received a college tuition refund, does that include money from 529 or could that be from scholarships or other? If it was definitely 529, did you immediately deposit the money back into the 529? Yes, you are supposed to immediately add it back to the 529, otherwise, it is income and taxable. Which is why I am trying to find a way to make it money used for living expenses -if possible. See 529 for Room and Board.

You say the 529 is over QEE so I will believe you. When you enter the 529, you also enter the AQEE  - adjusted QEE - remember to subtract the refund from QEE.  The program can figure out the difference and make it taxable.  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.

The 529 only goes on one return. Not knowing more, I suggest  this article  Guide to IRS Form 1099-Q: Payments from Qualified Education Programs. It sounds like you know it is the student return. 

You mentioned scholarship income as well. We like to make it taxable and give the parents an education credit when possible. The IRS has a great brochure that explains how scholarships and tax credits interact.

Not knowing more about the income received, you may need to deal with the kiddie tax. Here are scholarship income facts:

• Scholarship income is a hybrid of earned income and unearned income.
• Earned income  for purposes of the filing requirement - Single $12,950 
• Earned income for the  dependent standard deduction is earned income + $400 
• Unearned income for purposes of the kiddie tax and other 

It sounds like your student may have $2500 of unearned income.  See What is the Kiddie Tax?

[Hal_Al]

You probably did not get a refund. More likely, your student got part of his scholarship in cash. That is already accounted for in box 5 of his 1098-T. Do not enter that "refund" in the 1099-Q interview.

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 desired outcome, when you make your entries. 

______________________________________________________________________________________________

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 which is only qualified for the 1099-Q)

   -$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. 

[BK2000]

@Hal_Al 

RE: You did not get a refund. Your student got part of his scholarship in cash.

EXACTLY.  and thank you for the clarity.

RE: That is already accounted for in box 5 of his 1098-T. Do not enter that "refund" in the 1099-Q interview.

Box 5's amount exactly matches the grand total of scholarships awarded, let's say $10K for simplicity ($8K initially + $2K later).  Because I had paid the tuition already before rest of the scholarship ($2K) got awarded, the student received the $2K.

Q: Are you saying that I should ignore the $2K completely?  Because is it not a refund rather it is an over-payment?

[Hal_Al]

Q: Are you saying that I should ignore the $2K completely?  Because is it not a refund rather it is an over-payment?

A. No. It's gonna be taxable scholarship or it's going to reduce the amount of the 529 earnings that are tax free. You can let TT figure that out or you can crunch the numbers to see which is the best way to enter it, like we did last year (https://ttlc.intuit.com/community/college-education/discussion/1099-q-1098-t-and-related-tax-reporti... )

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student?
• Is the student a degree candidate attending school half time or more

[BK2000]

Thank you @Hal_Al  and here's the info

• Are you the student or parent: Parent
• Is the student the parent's dependent: Yes
• Box 1 of the 1098-T: 12,570
• Box 4 of the 1098-T:   1,914  (what is the impact of this?)
• Box 5 of the 1098-T: 13,877
• Box 6 of the 1098-T:     497   (do I need to do a 1040-X for last year?)
• Box 8 of the 1098-T: checked
• Rest are blank
• Any other scholarships not shown in box 5: Yes, $333
• 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: No
• Extra: Took an online class at another qualified school for $682. Requested the 1098-T or tax id.

• Box 1 of the 1099-Q: 18,000
• Box 2 of the 1099-Q:   8,783
• Box 3 of the 1099-Q:   9,217
• Box 5 of the 1099-Q: State
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)? Student
• Room & board paid. School's published COA for R&B: $16,980
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers: $5,131

• How much taxable income does the student have, from what sources: $2,555 from W2 (nothing else, no unearned income)
• Are you trying to claim the tuition credit (are you eligible)? Yes and Yes, so far I do get the $2,500 AOC as the parent
• Is the student an undergrad or grad student? Undergrad, 2nd year
• Is the student a degree candidate attending school half time or more? Yes, fulltime

Out of town, will review and communicate back on Monday.  THANK YOU!

[Hal_Al · Accepted solution]

It looks like you've done a  perfect job of matching total expenses to sources of funds.  You can claim the American Opportunity Credit (AOC) and none of the scholarship and none of the 529 distribution is taxable.  Save yourself the effort and potential frustration and just don't enter the the 1099-Q* or 1098-T** on the student's return. 

Yes, you can ignore the "refund".

I can't help you with boxes 4 and 6 of the 1098-T.  Depending on the details, an amended 2022 return may be required, but probably not. 

*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 have done the math to see if there were enough expenses left over for you to claim the tuition credit and keep scholarships tax free. 

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”.

**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. In your case, the student is neither claiming anything or reporting anything. 

[BK2000]

@Hal_Al 

As always THANK YOU!