Why is TT taxing my 1099Q distribution when entering the info? The amount was 100% used for qualified education. I've read in the other comments that you do not have to report it and it will only show on the worksheet? When entering as info it's taxed. t

[FangxiaL]

If you are the recipient (your name and your SSN on the 1099-Q form), you need to report it on your return even if it is used 100% for qualified education expenses. Did you (or your dependent) also receive a 1098-T form? Enter it on your return as well if you are claiming your student as a dependent.  

For the future year, you can make a direct payment to the college instead of withdrawing the funds and then paying to the college. In this way, your student will be considered as the recipient and you won't enter it on your return. 

After entering your 1099-Q form, make sure to enter expenses and scholarships to let TurboTax know that you have qualified expenses:

1. Open or continue your return 
2. Click Show more next to Education under the Deductions & Credits section
3. Click on Start/Revisit next to Expenses and Scholarships (1098-T)
4. Follow the screens to enter your information about the school and the amount paid.

The earnings should not be taxable after you enter the qualified education expenses. But sometimes you might be better off by paying some taxes on the earnings and claiming the American Opportunity Tax Credit if you qualify (the credit is worth $2,500).

[Hal_Al · Accepted solution]

You heard correct: you do not need to enter the 1099-Q, 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! 

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." 

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That said, there is a glitch in TT. It does not "sense" that you do not qualify for a tuition credit so it allocates expenses to the credit (sometimes $4000 but usually $10,000).

If you feel more comfortable having TT produce the work sheet, there are some things you can try:

Go through the education section again. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “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.

Instead, in the education interview, you may reach a screen titled "Choosing a larger education Credit". Verify that TT has entered $10,000 (the amount needed to get the maximum LLC) in the box on that page. In your case, change it to 0.

PLAN C.  On the Student Information Worksheet (abbreviated Student Info Wk on the forms list), go to part VI and change line 17 (“Used for credit”) to 4000. Make the change in the first column.  That will automatically change the other columns.

[Hal_Al]

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. 

[brenda93]

My 1099-Q has an amount in box 1.  This is money I had taken out of the Learning Quest 529 qualified education account.  When I enter the number in box 2 under earnings it makes the taxes I owe on the federal side go up.  Then I enter the amount in box 3 that says basis and nothing changes on my tax situation.  I used the money for 100% qualified school expenses and have proof of that.  Do I need to enter ANY of the boxes on my 1099-Q form or just totally ignore it.  I feel I received the 1099-Q form in error.  Why should I have to pay income taxes on the earnings when I enter it in box 2?  Please advise how to proceed.  Which boxes I need to enter if any on my tax return? My son is a dependent and attends college full time.  

[SusanY1]

You can remove the 1099-Q from your tax return and save it in your records when it is used 100% for qualifying expenses.  

You can also leave it in, and enter your expenses in TurboTax but this is typically not required unless you need to show a portion of it as not used for such expense. 

The IRS does not require that the information on the form be entered on your tax return at all if none of the distribution is taxable.  Keep the form and your receipts together in an easily accessible place for at least three years, in the unlikely event that the IRS asks for the information.  

[Hal_Al]

Q. Do I need to enter ANY of the boxes on my 1099-Q form? 

A. No.  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. 

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.  Can I  just totally ignore it. 

A. You can just ignore it, UNLESS you are eligible for the tuition credit (your income is not too high). Then you would  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.  So, you may have to re-allocate some of the expenses to claim all three tax benefits (tax free scholarship, tuition credit, and 529 distribution earnings exclusion).  See the detailed previous post, above.