Who files 1098-Q? Parent or student?

[niromae]

My daughter's in college, and generally speaking would have a very simple return - she made just a few thousand dollars from a summer job, paid no meaningful taxes and had non meaningful expenses.  Just a whole bunch of zeroes and not applicable. She is claimed by me as a dependent.

But -- she got scholarship money from college (1098-T) and used some of her 529 plan money (1099-Q).  The 529 money went directly to enrolling in some additional courses that were not accounted for in the regular tuition balance.

I started entering her Q form (since it's addressed to her) and TT popped up saying that since she's a dependent of somebody else, typically I would take care of the 1098T.  Fine, I guess ... except I was in the middle of dealing with the Q form. 

Worse, adding the Q form told me that she'd owe money because it was more than her qualified expenses, unless I then filled out the associated 1098T, showing that it was a fine use of the money.

Her return goes through TT fine, doesn't complain about anything, nothing to review.  But I guess before I hit the submit button I wanted to make sure -- did I screw myself in any way? I haven't done my taxes yet. Is it better for me to leave off both the Q and T forms when I submit her taxes and then deal with it myself on my end? I tend to end up paying when I file, so if there's any opportunity for me to maximize my return I want to take it. I'm thinking it's just a wash either way, but thought I'd check. Should I put it on both? Since it didn't affect her return in any way would that still be double dipping?

[Hal_Al · Accepted solution]

Q. Who files 1098-Q? Parent or student?

A.  The" recipient" (see below for definition),  if it needs to be reported. Usually it does not need to be reported, at all. 

Q. Is it better for me to leave off both the Q and T forms when I submit her taxes and then deal with it myself on my end?

A. Yes, most likely. But, I can't tell you for sure without the numbers.

  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”.

Q.  I'm thinking it's just a wash either way, but thought I'd check. Should I put it on both? 

A. Even though she has a scholarship and a 529 distribution, you are, most likely, still eligible for the tuition credit with a little re-allocation of expenses. 

Q. Since it didn't affect her return in any way would that still be double dipping?

A. It depends on how the re-allocation is done.

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?

___________________________________________________________________________________________

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. 

[niromae]

Thank you for the lengthy response.  To summarize, without getting too much into the weeds of the numbers, I think my best option is to just drop the Q and I as the parent will deal with the T on my return.  In the context of expenses, this wasn't a situation like "We'll take $5000 out for expenses and keep track of receipts" or anything like that where we aren't completely sure. She went through her normal course selection, we got the regular winter bill, we set up plans to pay it ... and then she said, can she take a course over break.  So I just paid for that course out of her 529 plan. So I know it is 100% covered as an educational expense. it's the only one I made and it went straight to cover 100% of that cost. I think there's a simple path through this.

[AmyC]

The Q should not be entered since it all went to education expenses. It could be allocated to room and board, or other expenses, if need be.

The 1098-T is only entered on the student return if income must be claimed from the scholarships. Otherwise, the T can go on the parent return and be allocated as needed for college education credit. The IRS has a great brochure that explains how scholarships and tax credits interact.

IRS Publication 970, Tax Benefits for Education states on page 45:  Don't report tax-free distributions (including qualifying rollovers) on your tax return.