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Segal100
Level 1

Why is TurboTax taxing my 1099-Q distribution for my daughter even though her college tuition exceeds the distribution?

I'm the recipient of the distribution. We did not apply for any of the credits, like the American opportunity or the Hope one.
I've entered a 1099-T for her with the tuition exceeding the distribution.
When I enter the 1099-Q, the tax I owe increases. I believe it should be tax free.
Any help would be appreciated.
1 Best answer

Accepted Solutions
Hal_Al
Level 15

Why is TurboTax taxing my 1099-Q distribution for my daughter even though her college tuition exceeds the distribution?

TurboTax (TT) will automatically claim the AOTC and assign $4000 of the available expenses to it.  That reduces the amount available for the 529 1099-Q and some of it becomes taxable. The AOTC is more generous than the 529 earnings exclusion, so most people should go along with TT's allocation*.

 

Room and Board, even if the student lives at home, is a qualified expense for the 529 Distribution, so you should enter that to reduce the taxable amount. 

 

 

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." So, if you know none of it is taxable, you do not have to enter the 1099-Q. 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.

 

*If you want to change it, 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.

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3 Replies
Segal100
Level 1

Why is TurboTax taxing my 1099-Q distribution for my daughter even though her college tuition exceeds the distribution?

An update. I noticed that when I increase the tuition amount a lot, just to test, I don't pay any tax. Under $25K in tuition it starts to calculate some tax.

Thanks.

Hal_Al
Level 15

Why is TurboTax taxing my 1099-Q distribution for my daughter even though her college tuition exceeds the distribution?

TurboTax (TT) will automatically claim the AOTC and assign $4000 of the available expenses to it.  That reduces the amount available for the 529 1099-Q and some of it becomes taxable. The AOTC is more generous than the 529 earnings exclusion, so most people should go along with TT's allocation*.

 

Room and Board, even if the student lives at home, is a qualified expense for the 529 Distribution, so you should enter that to reduce the taxable amount. 

 

 

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." So, if you know none of it is taxable, you do not have to enter the 1099-Q. 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.

 

*If you want to change it, 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.

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Hal_Al
Level 15

Why is TurboTax taxing my 1099-Q distribution for my daughter even though her college tuition exceeds the distribution?

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General discussion

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 $600

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

60%x600= $360

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

 

**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.

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