Hello,
I’ve spent over an hour on the phone with TurboTax Live help, and although they have tried to be helpful, no solutions were forthcoming, yet it seems to me that it should be a fairly straightforward process. Below I am using rounded figures to make the arithmetic easier.
I have a CA 529 college savings account for my grandson. He is currently attending a special high school requiring a tuition and I withdrew $7,000 from it in 2021. A total of $3,000 of it was earnings and $4,000 was the contribution, i.e. the basis, money I deposited into the account over the years. These figures are confirmed by the 1099-Q I received from the 529 plan. As long as the withdrawal does not exceed $10,000 per year, there is no federal taxation on this 529 withdrawal (though there is the ability to post this withdrawal and its full deduction on the federal return), but California imposes both an income tax and an additional 2.5% tax on the earnings portion of the withdrawal. TurboTax handles the regular income tax portion perfectly; It adds the $3,000 to my income and computes the CA tax on it and adds it to my CA income tax due. However, it does not seem to add the 2.5% extra tax anywhere. In addition, CA requires filing a form 3805P to indicate that the 529 withdrawal was for a secondary school rather than a college, and this too was not done, even though the form has been listed as “available” in TurboTax for at least the past several days.
I hoped that entering this 529 transaction on the federal return (on Miscellaneous income/Coverdell ESA and 529 qualified tuition programs (Form 1099-Q)) would prompt TT to carry this knowledge over to the CA returns and a 2.5% extra tax, as well as a completed form 3805P, would be automatically generated. Neither happened.
On the CA return interview (under Income and adjustments/Expanded use of 529 account funds), I entered the earnings of $3,000. TT correctly computed and added state income tax for this figure, but did not compute and add the extra 2.5% tax, nor did it generate a form 3805P. I got Live Help twice and neither person could resolve this issue, or tell me if I could manually add a form 3805P and somehow add the 2.5% tax. I hope someone can advise me on a way to get past this issue.
Thank you
