@vasto7
Yes, all of that is Kosher. You don't have to literally assign the scholarship to R&B . You just call it taxable income (calling it R&B is just an entry technique in TurboTax). Assign all the R&B expenses to the 529 distribution. So, for your numbers, none of the $30K distribution is taxable. Even when some of it is taxable, it's only a portion of the earnings (box 2 of the 1099-Q) that gets taxed.
Q. Are there any pitfalls to watch out for in TurboTax (TT) to make sure this is done correctly?
A. Yes. Theoretically, TT can handle all this. But, it gets tricky. It's best if you have some idea of the outcome expected, when you make your entries. Reply back, at tax time, if you encounter any problems. Work arounds are available. Simply not entering the 1099-Q (when you know none of it is taxable) is one simple method.**
If the student has no other income, you can make up to $14, 600 (the 2024 standard deduction) taxable and the student will pay no tax. So, you can shift more of the expenses to a bigger 529 distribution.
Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the filing requirement ($14,600 for 2024) and the dependent standard deduction calculation (earned income + $450 (for 2024)). It is not earned income for the kiddie tax and other purposes (e.g. EIC).
**You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms.
References:
1. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying r
