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Get your taxes done using TurboTax
I appreciate your response. It didn't quite hit my question, so I'll be more specific: TurboTax seemed to be treating ALL my disbursement (including the basis) as taxable. My recent research shows that I am stuck in the same boat as several people I just found on this thread:
https://www.bogleheads.org/forum/viewtopic.php?t=216633
SCENARIO: I contributed $750 in a "529" for my daughter years ago, and now we withdrew it (it grew to a paltry $761) to pay for my dependent daughter's tuition. So then I entered the tuition into TurboTax, and my refund went up in TurboTax. I then entered the 1099-Q disbursement, and my refund went down by the amount of the disbursement ($761). If that disbursement had come from outside the family, I might understand. But what TurboTax is acting like is that I get taxed twice on that money: once when I earned it and put it in the 529, and also now.
TURBOTAX SOFTWARE'S ACTION: I dug into the TurboTax Forms Mode to see why. I appears that in the 2019 Student Info Worksheet Part VI line 18, the $761 is automatically entered as "Used for exclusion" from the Education Credit, which decreases the amount of Education Credit I get for the tuition. They are saying that because you got 529 money from someone to pay for that tuition, you shouldn't get a tax credit for it. I would understand this thinking if the 529 money came from another organization. But that money didn't come from another source: I put it away for future college needs in my family. I *think* the "Used for exclusion" box should not apply in my case, since I am both the contributor to the 529 and the receiver of the Education Credit. Unfortunately I cannot find any instructions for how that field is/should be calculated. How can I override that calculation? It won't let me type in that field.
If it is not possible because it is not legal, then this 529 system is broken for parents -- how else am I supposed to put away $529 money for kids' college? As TurboTax is now (I just experimented), I get a bigger return when I claim the 1099-Q money as "not used for college expenses" and just get taxed on the $11, but then I get the full Education Credit for tuition. Something is broken -- either the software or the 529 concept!
I just found a doc that might explain TurboTax's thinking: page 14 in "Tax Benefits for Education" https://www.irs.gov/pub/irs-pdf/p970.pdf describing American Opportunity Credit eligibility says under Adjustments to Qualified Education Expenses: "reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance...." The GROWTH of a 529 is tax-free, but not the basis (which was already taxed). TurboTax is reducing it by the basis, which is a mistake.
PROPOSED SOLUTION: I think I have played with every box and entry I can find related to Education in TurboTax, and I cannot get this refund right while being open & honest (the only acceptable path for me). I think TurboTax needs to be corrected to NOT apply 529 basis money as an exclusion from Education Credits when the Education Credit tax beneficiary IS the 529 "Owner".
Do you agree? Did I explain it okay? Thanks for your time.
APPENDIX: Other complains about this line item, just to show I'm not alone in my confusion (all dead-ends, no need to read):
