Parent is recipient of 1099Q distribution that was used to pay child dependent beneficiary qualified education expenses. TT-2025 appears to incorrectly calculate the distributation as taxable..
The parent took a distribution from their 529 account (parent is the account owner) in 2025 to pay their dependent child beneficiary's qualified education expenses, for example college tuition. The dependent child is named as the beneficiary on the 529 account. The beneficiary that is on the account is also the same for which the funds that were withdrawn from the 529 were used. Let's say that the total qualified education expenses were $5000 for the 2025 calendar year.
The amount that was withdrawn from the 529 account in 2025 was $5000 that was used to pay for qualified college expenses that were incurred in 2025. The child received a 1098t-2025 of $5000 for the 2025 expenses. There were no scholarships received in 2025, so the $5000 were all out-of-pocket expenses incurred by the student.
Because the parent took the distribution, the 1099-Q at the end of the year was issued to the parent as the recipient.
On the parent's TT return, the parent was entered as the recipient of the 529 distribution and the child as beneficiary for which the distribution was used. The TT return shows that the beneficiary's student information sheet Part VI Education Expenses is showing the allowed qualified education expenses for the 529 plan of $5000. There are no credits this year for the AOC or life-time-learning credit. So, there should not be any taxes paid on the 529 distribution earnings. Yet, the student information worksheet Part VIII 2g and 2h (Adjusted Qualified Higher Education Expenses Applied) for the purposes of calculating the regular taxes are 0. Because the AQEE is not being subtracted from the distribution, TT then goes and calculates the tax on the full earnings.
By-the-way, if the beneficiary is entered as the recipient with everything else being the same, then Turbo Tax does report that no tax is due and the 1099-Q should be deleted. So, TT seems to be miscalculating when the taxpayer (parent) is different from the beneficiary.
Let's also say that for the purposes of the tax calculation that the basis was $3000 and the earnings was $2000.
However, under the column of "For the purposes of the 10% additional taxes" the $5000 is reported there.
So, in the end turbo tax is calculating the regular tax rate on the $3000 earnings but not applying the additional 10% tax penalty on the distribution. So, it is correct in not applying the 10% tax penalty. But wrong in that it should not be calculating tax on the earnings.
However, other posts I have seen say that if the parent takes a 529 distribution and pays for their child beneficiary's qualified expenses in the same calendar year and the distribution is less than the AQEE, then any earnings on the 529 distribution are not taxable and not reportable.
If that is true then, TT appears to have a bug and is not calculating correctly when the above information is input. There should be no tax on the earnings calculated by TT. It's really hard to know if TT is miscalculating or there is something important to know where the tax laws intend that the tax on the earnings in this case is actually due. Some suggest just don't report the 1099-Q if no tax is due. But we often want to put the data in TT expecting TT to calculate correctly and help the user know whether taxes would or would not be due in their particular case.
I also looked at the 2025 Tax Pub 970 Tax Benefits for Education.
These are the only mentions i could find in Pub 970
"What is the tax benefit of a QTP? No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses (AQEE)" and "The recipient of the distribution generally doesn’t have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to AQEE (defined under Figuring the Taxable Portion of a Distribution, below). "
