Why does TT say that my student beneficiary must report $$ of taxable income from our 529 distribution?

[maglib]

Go back throught the education interview.  there is a question about the amount you want to use for education tax credits....  reduce the number from 10k.... 

The reason this number is editable is there are often times when creating a portion taxable, may be beneficial.... it can create an ability for the parent to claim an education tax credit and only enough income to the student where they will owe no taxes or less taxes then the parents can get credited.... you need to play around to get the best bang for the buck.  (Note the earned income for the student is also considered kiddie taxable, it also can qualify to allow the student to open an IRA..., lots of reasons why you may want this number to stay at $10k).

It is up to you to play with taxable to the student vs. tax credits to you and what works best. And yes, the IRS does allow this.

After you edit that number, continue and make sure you check to maximize my education credits.

[paquara]

I have already e-filed my tax return and had this comment on my return due to the 529 plan distribution.  The amount of payments received from the college on the 1098 T exceeded the amount on the 1099 Q and for the life of me I cannot figure out where the amount that it says my student needs to report as taxable income comes from.  My student does not work or have any other income for me to typically file a tax return.  How can I fix this?  Should I amend my return?  

[Hal_Al]

@paquara said " The amount of payments received from the college on the 1098 T exceeded the amount on the 1099 Q".

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board, books and computer 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.

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." 

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! 

______________________________________________________________________________________________

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 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 (usually on the student’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

You have $1120 of taxable income  

**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. 

[paquara]

Reply to Alternatively comment below:   How do I include - room and board (even if the student lives at home)?  Also, she had to get books for her classes but I had thought that required books only available at the university were allowed to be deducted, not ones she rented or purchased through any vendor.  

[paquara]

@Hal_Al   Reply to Alternatively comment below:   How do I include - room and board (even if the student lives at home)?  Also, she had to get books for her classes but I had thought that required books only available at the university were allowed to be deducted, not ones she rented or purchased through any vendor.  

0

reply

[#6]

@Hal_Al   Reply to Alternatively comment below:   How do I include - room and board (even if the student lives at home)?  Also, she had to get books for her classes but I had thought that required books only available at the university were allowed to be deducted, not ones she rented or purchased through any vendor.  

[Hal_Al]

If the student lives at home, you may not claim "room" (unless the student pays rent) but you may claim food ("board").  You can keep track of the student's  actual food cost or claim the schools meal plan charge for on-campus students, whichever is less.

For the tuition credit, books may have to be purchased from the school.  But, to be a qualified  529 plan expense, all books count, regardless of where purchased or rented. 

[paquara]

@Hal_Al  She was in school for the spring semester 2021 and we paid for food there but not until January of 2021 so I can use that as a basis for her food.  So I should refile and amend my tax return?

[Hal_Al]

@paquara  said " She was in school for the spring semester 2021 and we paid for food there but not until January of 2021 so I can use that as a basis for her food".

Did you mean she was in school spring 2020?  Any  2020 expenses, not paid  until 2021,  are non-qualified expenses for a 529 distribution.  Expenses must be paid in the same year as attendance, to be qualified.  The one exception: you may pay for Spring 2021, in 2020, and have it count for a 2020 distribution. 

[paquara]

@Hal_Al In 2020 she was at home for both summer and fall semester due to Covid and classes changed to all online.  I paid for her spring 2021 tuition in 2020 so that was part of the expenses claimed on the 2020 taxes.  She returned to college dorm/meal plan for spring 2021, paid for in 2021 (so will claim on 2021 taxes).  I was only going to use the cost of the meal plan as a basis for estimate for what she would have paid meals for the 2 semesters she was home as you suggested.  

[paquara]

@Hal_Al  Where in Turbo Tax, would I enter the amount we would have spent on meals for the semesters she was home?       For fall 2021, she will be living off campus so would I be able to also deduct her rent/meals when doing my 2021 taxes?   

[Hal_Al]

Q. Where in Turbo Tax, would I enter the amount we would have spent on meals for the semesters she was home?   

A.  In the education expenses section, answer yes when asked if you have book expenses.  That will give you the scree to enter room & board.  There is only the one box for room & board.

Q.  For fall 2021, she will be living off campus so would I be able to also deduct her rent/meals when doing my 2021 taxes?   

A.  Yes, but the amount allowed is limited to the lesser of actual costs or  the school's charge for on campus room & board.

[paquara]

@Hal_Al  I added the fees for board within the return and changed the amount in the "calculate the education credit or deduction" section which kept my return the same for tax owed (and paid) and reduced the amount that my child had to pay in "kiddie tax" to  $155.  When I  do my child's return, what section do I enter this amount?  What is it considered?  And by changing the fees in the education section of my return doesn't change any tax owed  but does change what she has to pay, I still need to file an amended return correct?

[Hal_Al]

You do not need to amend your tax return.

You earlier said "My student does not work or have any other income".

If  the $155 is the taxable portion of the 529 distribution, it does not need to be reported at all.  If that is her only income, she does not need to file a tax return. A dependent's income filing threshold is $1100 of unearned income.  

[paquara]

@Hal_Al last question.  The initial amount owed by the student on my initial submitted tax return was $1372.  When I went back into turbo tax to make the changes to add board and change the amount to calculate education credit or deduction is when the amount student owed reduced to $155.  So it seems like I would have to amend my filed return to include these numbers to reduce the amount the student owed so she would not have to file taxes and the information put on my taxes would correspond and be correct.