Solved: Why does entering 1099-Q info for 529 plan distribution increase taxes when I used $ to pay education expenses? And entering one kid's 1099-Q does this, but not another's
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New Member

Why does entering 1099-Q info for 529 plan distribution increase taxes when I used $ to pay education expenses? And entering one kid's 1099-Q does this, but not another's

I have two kids in college, each with a 529 plan. I made qualified withdrawals for each and used the money to pay tuition. The entire withdrawals, much less the earnings, were less than the total education expenses paid. When I enter the 1099-Q for one kid, my taxes do not change. When I enter the 1099-Q for the other, my taxes increase. Both kids have 1099-T info entered. 

The earnings withdrawn from the 529 should not be taxable, but TurboTax increases my taxes as if the withdrawals from one of the kids (but not both). 

Help!

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Level 15

Why does entering 1099-Q info for 529 plan distribution increase taxes when I used $ to pay education expenses? And entering one kid's 1099-Q does this, but not another's

TurboTax (TT) assumes that some of your tuition expenses are used to claim the tuition credit. You cannot "double dip". 

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 (usually on the student’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $600

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

60%x600= $360

You have $240 of taxable income (600-360)

If you are ineligible, for the credit; Go through the education section again. When you get to the screen that says “Here’s your Education Summary”.  Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.

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.

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Level 15

Why does entering 1099-Q info for 529 plan distribution increase taxes when I used $ to pay education expenses? And entering one kid's 1099-Q does this, but not another's

TurboTax (TT) assumes that some of your tuition expenses are used to claim the tuition credit. You cannot "double dip". 

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 (usually on the student’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $600

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

60%x600= $360

You have $240 of taxable income (600-360)

If you are ineligible, for the credit; Go through the education section again. When you get to the screen that says “Here’s your Education Summary”.  Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.

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.

View solution in original post

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New Member

Why does entering 1099-Q info for 529 plan distribution increase taxes when I used $ to pay education expenses? And entering one kid's 1099-Q does this, but not another's

I had really struggled with why my qualified distribution was being treated as taxable income even though I had matching qualified expenses.  This answer finally pointed me in the right direction.  One thing to note:  where it says above "verify the amount you want to use or change it", make sure that if you don't qualify for or don't want to claim the Education Deduction or Credit you enter $0 here.  Otherwise the first $4k of your expenses are cancelled out even if you don't qualify for the credit.  Hope this helps.
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New Member

Why does entering 1099-Q info for 529 plan distribution increase taxes when I used $ to pay education expenses? And entering one kid's 1099-Q does this, but not another's

I have the same exact  question.   The monies wee distributed to me, and I immediately used them to pay tuition and room and board.   My understanding was that funds from 529 plans, including he earnings were not taxable.  

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Expert Alumni

Why does entering 1099-Q info for 529 plan distribution increase taxes when I used $ to pay education expenses? And entering one kid's 1099-Q does this, but not another's

A Section 529 distribution, or some portion of it, can be considered as income, but it depends.

If a Section 529 distribution exceeds the amount of a student’s qualifying expenses, the amount of the excess must be reported as taxable income on your return. 

If the distribution amount doesn’t exceed the student's qualifying expenses, none of the distribution is reportable as income. 

For more information, please see Qualified Tuition Program in the IRS’ Publication 970, Tax Benefits for Education, and TurboTax’s article "What is IRS Form 1099Q?"

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