It is not unusual for a portion of the earnings on a 529 plan to be taxable. Although distributions that pay for qualified expenses are usually tax free, you cannot "double dip".. If some of those same college expenses were paid by tax free scholarship and/or used to claim an education credit; some of the distribution may be taxable,
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship
-$4000
used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q
Box 1 of the 1099-Q is $5000
Box 2 is $600
3000/5000=60% of the earnings are tax free
60%x600= $360
You have $240 of taxable income (600-360)
Turbotax (TT) can handle it, but it's complicated and it's helpful if you understand the process.
