The 1099-Q should be reported on the tax return of the person whose SSN is on the form (your child) and it only needs to be reported on the tax return if the withdrawal is more than the tuition paid in Box 1 of the 1098-T plus other adjusted qualified educational expenses. In that case, the earnings on the excess distribution would be taxable income. To find out what are qualified educational expenses, please review the Guide to Tax Form 1098-T: Tuition Statement and the IRS link on Qualified Education Expenses.
You can avoid paying taxes on the refund received from funds that were paid from the 1099-Q withdrawal if the refund is recontributed within 60 days. If you did not recontribute those funds, you still may not have to pay taxes on the refund because you stated that your child incurred additional education expenses.
To determine if you need to report the 1099-Q, add up the tuition paid from the 1098-T in box 1 plus the qualified education expenses and subtract the amount that was refunded. If the total is more than the amount in box 1 of the 1099-Q, you do not need to report it. If the total is less than the amount in box 1, some of the earnings in box 2 of the 1099-Q will need to be report the 1099-Q on your child’s tax return as ordinary income and they will pay an additional 10% penalty tax as well on that amount. TurboTax will ask you questions as you enter the 1099-Q and make the calculations. The gain is not reported, if it was used for qualified education expenses.
You can report the 1098-T on your tax return if your child qualifies as your dependent. You may also qualify for the Lifetime Learning Credit or the American Opportunity Tax Credit if it is not for the same expenses that were paid from the 1099-Q withdrawal. When a student’s school expenses are paid with these funds, you cannot claim a tuition deduction or either of the educational tax credits for the same expense. For example, If the 529 Plan withdrawal was $5,000 and the tuition and qualified educational expenses are $10,000, you can claim a $1,000 lifetime learning credit on $5,000 of expenses, and the qualified expenses on your 529 plan will be reduced by $5,000.
Please see the TurboTax articles Guide to Tax Form 1098-T: Tuition Statement and What Are Education Tax Credits? For additional information.
If your child files a tax return, make sure they check the box indicating that someone else will claim her as a dependent.
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