YES, THANK YOU!!!!! You have explained it VERY clearly indeed.
May I trouble you with a related question? If I have the non-qualified distribution sent to myself, it will, of course, be taxed at my current tax bracket. However, if I have it sent to my child, the tax is considerably less.
I have done a WHAT IF for my child's taxes and added the distribution to her income by having the 1099-Q sent to her as the beneficiary. I notice that she is only taxed on the earnings ($4000) for both federal and NYS, with an additional 10% penalty for the former.
However, on my return, Line 16 is blank (so I'm not taxed on the earnings) but Line 22 (NYS additions for NYS 529 distributions) is $26000. And Line 30 (NY subtractions - NYS 529 distribution earnings) is now zero.
Thus, it appears that I am taxed by NYS on both the remaining basis (22K) plus earnings (4K) making a total of 26K of additional income, but my child is ALSO taxed on the 4K of earnings. That is, the earnings portion are taxed twice - once for her and once for me.
What is the rationale for this double taxation, assuming that the program is behaving correctly?
Thanks again. Your help is much appreciated.
