It
depends on your exact situation. Your distribution is made up of your
contributions which is your basis (box 3 of 1099Q) and also your earnings (box
2 of 1099Q). The contributions are never taxable. However, when your total distribution is greater than your adjusted qualified education expenses, then your earnings
are taxable.
Qualified education expenses are reduced by the amount of any tax free educational assistance, such as scholarships, that you receive.
Qualified education expenses are also reduced by the amount of educational expenses that were used to calculate the American opportunity credit or the lifetime learning credit, if you claimed either of these credits on your 2016 tax return.
Additionally, there is also a 10% penalty tax when you
have a taxable distribution but there are exceptions to this tax such as if you
received a scholarship or claimed certain education tax benefits. Please refer
to page 55 of pub 970 under the heading, "additional tax on taxable
distributions" for additional information. https://www.irs.gov/pub/irs-pdf/p970.pdf
Please refer to pages 52-55 of pub 970 under the headings, "distributions", "adjusted qualified education expenses", "taxable distributions, and "coordination with American opportunity credit and lifetime learning credit" if you would like to learn more.
