Q. I’ve reduced the medical costs associated with the tuition on our return by the earnings (block 2) reported on the 1099Q. Should I have reduced the medical costs of the tuition by the entire $10,000 of the 529 distribution, instead?
A. Yes.
Tax is only calculated on the earnings portion (box 2 of the 1099-Q). but in determining that amount, you compare the qualified expenses to the total distribution.
Example:
$8,000 in educational expenses(including tuition qualified Medical )
Box 1 of the 1099-Q is $10,000
Box 2 is $3000
8000/10,000 = 80% of the earnings are tax free; 20% are taxable
20% x 3000 = $600
There is $600 of taxable income on the recipient’s (the parent in this case) return (plus 10% penalty)
