In 2020 I had a couple of distributions (to me) from a qualified 529 plan for tuition and expenses for my dependent child. I received the 1099-Q and entered the information into TurboTax (as I have for the last several years). I included 1099-T information + additional allowable expenses, the sum of which is less than the total distribution from the 529. However, I also used the money to pay off outstanding student loans in my child's name - given the SECURE Act of 2019 changes allowing up to 10K (lifetime) in student loan payments to be used from the 529 distribution. I entered the loan payment information in TurboTax when prompted. The sum of the tuition + additional expenses + loan payments exceeds the 529 distribution amount, as expected and planned. However, In looking at the resulting taxes (owed) and the generated tax forms, I see that TurboTax is not considering the loan payments in the distribution calculation and thus the excess distribution is being treated as additional income and is being taxed, with the added 10% penalty.
Looking at the forms within TurboTax, the Qualified Tuition Program question "Did the student make any education loan payments to treat as expenses?", the answer is Yes in the student worksheet (Part I 4a). In Part VIII (Apprenticeship and Education Loan Smart Worksheet) of the same worksheet I can see where the principal and interest information for the student loan payments were entered, and the calculations following that show "Earnings taxable to recipient" results in $0.
It appears though, despite the loan payment and the calculations above, that TurboTax has created a Form 5329-T showing "distributions included in income from a...QTP...account" equal to the 529 total distribution minus tuition + expenses, leaving out the loan payment information. This $$ amount shows on the Amount subject to additional tax and the subsequent 10% additional tax. This information is carried forward on 1040 Schedule 1 line 8 "Other income" from QTP.
I guess my question is why is this happening? I tried deleting the 5329-T form and re-entering information and nothing seems to make a difference. What am I missing?
Any help would be greatly appreciated.
