IRS publication 970 this is for 2018 tax year but would also apply in 2019
Are Distributions Taxable?
The part of a distribution representing the amount paid or
contributed to a QTP doesn't have to be included in income. This is a return of the investment in the plan.
The designated beneficiary generally doesn't have to
include in income any earnings distributed from a QTP if
the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution, later).
Earnings and return of investment. You will receive a
Form 1099-Q from each of the programs from which you
received a QTP distribution in 2018. The amount of your
gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Form 1099-Q should be sent to
you by January 31, 2019.
Figuring the Taxable
Portion of a Distribution
To determine if total distributions for the year are more or
less than the amount of qualified education expenses, you
must compare the total of all QTP distributions for the tax
year to the adjusted qualified education expenses.
Adjusted qualified education expenses. This amount
is the total qualified education expenses reduced by any
tax-free educational assistance. Tax-free educational assistance includes:
• The tax-free part of scholarships and fellowship grants
(see Tax-Free Scholarships and Fellowship Grants in
chapter 1);
• Veterans' educational assistance (see Veterans' Benefits in chapter 1);
• The tax-free part of Pell grants (see Pell Grants and
Other Title IV Need-Based Education Grants in chapter 1);
• Employer-provided educational assistance (see chapter 11); and
• Any other nontaxable (tax-free) payments (other than
gifts or inheritances) received as educational assistance.
Taxable earnings. Use the following steps to figure the
taxable part.
1. Multiply the total distributed earnings shown on Form
1099-Q, box 2, by a fraction. The numerator (top part)
is the adjusted qualified education expenses paid during the year and the denominator (bottom part) is the
total amount distributed during the year.
2. Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include in income. Report it on Schedule 1
(Form 1040) or Form 1040NR, line 21.
